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Business  Fundamentals 

How  to  Become  a  Successful 
Business  Man 


By 

Roger  W.  Babson 


NO  LONGER  THE  PROPERTY  OF 
SOSTOft  PUBLIC  uBRSiW 


:  ‘■w 


B.  C.  Forbes  Publishing  Company 

120  Fifth  Avenue 
New  York 

C 


Copyright,  1923,  By 
Babson  Institute 


First  Printing,  February,  1933 
Second  Printing,  April,  1923 
Third  Printing,  August,  1933 
Fourth  Printing,  September,  1923 


THE  PLIMPTON  PSESS 
NOIWOOD'UASS'D  *  S  *  A 


ROGER  W.  BABSON  AND  HIS  WORK 


THE  proof  of  the  pudding  is  in  the  eating  of 
it.  In  bygone  years  I  used  to  be  asked  more 
often  than  I  am  asked  now,  u  Is  Babson  sound?  ” 

The  pith  of  my  reply  invariably  was  and  is  that 
had  not  Babson  been  sound  he  could  not  have  suc¬ 
ceeded,  starting  with  nothing  but  his  brains,  in 
building  up  a  bigger  and  bigger  business  and  a 
wider  and  wider  reputation  each  succeeding  year.  *  a 
When  you  think  of  oil,  you  immediately  think 
of  Rockefeller.  When  you  think  of  the  telephone, 
you  immediately  think  of  Bell.  When  you  think 
of  the  automobile,  you  immediately  think  of  Ford. 

When  you  think  of  electricity,  you  immediately 
think  of  Edison. 

When  business  men  think  of  business  statistics 
today,  they  immediately  think  of  Roger  W.  Babson. 

It  might  be  said  with  little  exaggeration  that  he 
founded  a  new  science.  Until  Babson,  the  trained 
engineer  from  the  Massachusetts  Institute  of  Tech¬ 
nology,  applied  his  mind  to  them,  business  statistics 
were  rather  unrelated  things.  To  the  unopened 
eyes  of  those  days  they  pointed  nowhere  in  particu¬ 
lar. 

ft 


iv  P.OGER  W.  BABSON  AND  HIS  WORK 

Babson,  the  pioneer,  took  hold  of  them,  gathered 
more  of  them  than  had  ever  been  gathered  before, 
studied  them  through  and  through,  looked  into 
their  heart  —  and  even  their  soul  —  and  found 
that,  like  ancient  hieroglyphics,  they  were  capable 
of  yielding  valuable  enlightenment  to  those  who 
fitted  themselves  to  understand  them. 

With  greater  research  came  greater  experience, 
greater  skill,  greater  ability  to  analyze  their  mean¬ 
ing,  their  message,  their  portent. 

Today  Roger  W.  Babson  is  concededly  sui  generis 
—  in  a  class  by  himself.  He  has  created  a  unique 
monument. 

More,  his  research  and  writings  have  contributed 
invaluably  to  the  progress  and  prosperity  of  Ameri¬ 
can  business  and  the  American  people. 

And,  not  least,  Roger  W.  Babson  has  discovered, 
and  unabashedly  proclaimed,  that,  through  all  the 
apparently  tangled  skein  of  material  statistics  there 
run  laws  as  immutable  and  unchangeable  as  the 
Almighty,  laws  that  can  no  more  be  departed  from 
with  impunity  than  the  Golden  Rule. 

This  book  acquaints  you  with  these  laws  and 
points  the  way  to  following  them  successfully. 


B.  C.  Forbes 


TABLE  OF  CONTENTS 


CHAPTER  I 

PAGE 

The  Use  of  Statistics  f.  >•  ..  »•  i«;  [ . .  k,  i 

Comparative  and  fundamental  statistics  —  what  they  reveal 
—  relative  importance  to  business  men  —  sources  —  turning 
statistics  to  profit  in  business  and  investment. 

CHAPTER  II 

Fundamentals  and  What  They  Foretell  ...  io 

General  trend  of  economic  conditions  —  methods  of  opera¬ 
tion  mark  success  —  twelve  fundamental  subjects  and  their 
significance  —  the  two  great  fundamentals  of  business. 

CHAPTER  III 

Making  Figures  Talk  .  .  .  ..  .  .  .  . .  37 

Advantage  of  picture  or  chart  over  words  —  methods  of 
charting  various  data  —  bar,  u  pie,”  picture,  line  and  ratio 
or  percentage  charts  —  what  they  reveal. 

CHAPTER  IV 

Forecasting  Business  Conditions  ......  52 

The  cause  of  business  cycles  —  application  of  Newton’s  law 
of  action  and  reaction  —  how  fundamentals  become  barom¬ 
eters  instead  of  thermometers  —  forecasting  with  the  Bab- 
sonchart  —  the  typical  cycle. 


v 


VI 


CONTENTS 


CHAPTER  V 

The  Seesaw  of  Supply  and  Demand  ,  .  „  .  ,  . 

Three  important  phases  of  the  exchange  of  commodities  — 
the  fluctuating  price  equation  —  a  definite  procedure  iq 
buying  and  selling  —  agricultural  and  industrial  commod¬ 
ities  and  their  price  factors  —  analyzing  commodity 
statistics. 


CHAPTER  VI 

Scientific  Purchasing 

Forecasting  price  trend  —  group  commodities  —  finding 
authentic  sources  —  price  history  of  ten  staple  commodities 
—  service  and  profits. 


CHAPTER  VII 

Managing  Men,  and  Economic  Law  .  .  *  ,  . 

Two  distinct  problems  —  law  of  action  and  reaction  in  the 
field  of  human  relations  —  changing  attitude  of  labor  — 
frequency  of  strikes  —  growth  of  unionization  —  where 
employee  and  employer  make  mistakes  —  labor’s  “  say.” 

CHAPTER  VIII 

Solving  the  Production  Problem . 

Production  25  per  cent,  short  of  our  needs  —  a  new  phase 
of  business  with  prices  on  descending  scale  —  piloting  labor 
through  falling  wages  —  keeping  workers  informed  —  gen¬ 
uine  profit  sharing  and  mutual  faith. 

CHAPTER  IX 

Methods  of  Marketing  .  .  ,  . . 

Lack  of  adjustment  between  production  and  distribution 
—  selling  on  the  foundation  of  “facts  first”  —  Babson’s 
“  Merchandising  Analysis.” 


CONTENTS 


Vll 


PAGE 


CHAPTER  X 


Selling  a  City  .  K 


M  ».  K 


City  a  unit  for  consumer’s  goods  —  fitting  plans  to  local 
conditions  —  two  questions  about  a  locality  —  population 
statistics,  purchasing  power,  and  prophecy  —  charting  and 
forecasting  a  city’s  business  activity  —  merchandising  to 
meet  the  times. 


CHAPTER  XI 


Selling  an  Industry  . . ,  .  .  „ 

Meeting  changing  conditions  in  the  industries  —  selling 
scientifically  —  annual  purchases  of  all  industries  —  influ¬ 


ence  of  business  cycle  —  special  conditions  affecting  a  given 


industry  —  reducing  margin  of  error  in  business  judgment. 


CHAPTER  XII 


Trend  of  Business 


168 


Standardization  and  proper  distribution  —  chain  and  self- 
help  stores  —  developing  efficiency  of  buyers  —  trade  asso¬ 
ciations  —  business  counselors. 


CHAPTER  XIII 


Financial  Independence 


*77 


Life  experience  of  average  man  —  lack  of  financial  in¬ 
struction  —  need  of  systematic  saving  —  budgets  for  various 
incomes  —  employing  the  surplus. 


CHAPTER  XIV 

Investing  Your  Income . 

Enjoying  two  incomes  —  fundamental  principles  by  which 


185 


to  select  investments  —  bonds  the  typical  investment  —  the 
major  bond  cycle  —  margin  of  safety  —  diversification  — 


“  averaging  ”  —  distinguishing  between  speculating  and 
investing  —  financial  independence  at  fifty. 


Vlll 


CONTENTS 


PACB 


CHAPTER  XV 

Successful  Speculation  ....  ,.  t.  ,.  ...  .  204 

Intelligent  speculating  not  gambling  —  three  phases  of 
stock  market — how  the  long-swing  speculator  operates  — 
mistakes  of  average  speculator  —  pitfalls  to  avoid  —  how 
to  buy  and  when  —  profit  possibilities. 

CHAPTER  XVI 

Business  Problems  .  *.*  .  .  .  .  i.  .«  .  r.  r.i  c*i  ««»  f.i  i.  220 
Analyzing  the  reasons  for  failures  —  basing  constructive 
plans  thereon  —  labor  conditions,  past,  present,  and  future 

—  buying  commodities  —  going  with  the  market  —  na¬ 
tional  distribution  —  the  passing  of  salt  fish  —  retail  mer¬ 
chandising —  interpreting  needs  and  desires. 

CHAPTER  XVII 

Investment  Problems . .  239 

Money  harder  to  conserve  than  to  accumulate  —  invest¬ 
ments  continually  growing  better  or  worse  —  five  rules 

—  bond  classifications  —  studying  and  capitalizing  funda¬ 
mental  conditions  and  the  business  cycle. 

CHAPTER  XVIII 

Conclusion  . . . .  ,.  , .  .  251 

Natural  advantages  not  essential  to  prosperity  —  the  cycle 
of  family  wealth  —  fortunes  lost  by  failure  to  understand 
fundamentals  of  business  —  wheel  of  opportunity  con¬ 
stantly  revolving  —  the  “  Six  I’s  of  Success.” 


INTRODUCTION 


SOME  twenty  years  ago,  on  a  summer  afternoon, 
Professor  George  F.  Swain  and  I  sat  in  the 
tower-room  of  my  cottage  in  Gloucester,  Massa¬ 
chusetts,  poring  over  a  number  of  charts.  We  had 
been  doing  the  same  thing  off  and  on  ever  since  I 
graduated  from  the  Massachusetts  Institute  of 
Technology,  in  1898. 

For  five  years  I  had  been  obsessed  with  the  idea 
that  people  were  suffering  tremendous  loss  and 
much  needless  misery  due  to  economic  causes.  At 
Technology  I  had  found  physics,  chemistry,  and 
other  sciences  reduced  to  an  exact  basis  5  so  that  one 
could  tell  ahead  of  time  what  would  happen  if  he 
did  certain  things.  In  fact,  it  was  worked  out  so 
that  one  could  decide  upon  a  desirable  result  and 
then  mix  the  ingredients  that  would  produce  that 
result.  School  was  on  a  sound,  scientific  basis;  but, 
when  we  got  into  the  business  world  and  faced 
the  major  problem  of  making  a  living,  everything 
seemed  to  be  on  a  catch-as-catch-can  basis. 

The  economists  had  set  forth  a  few  rules,  to  be 
sure,  but  when  a  man  faced  the  personal  problem 
of  making  a  living,  either  in  working  for  some  one 
else  or  for  himself,  he  had  to  fall  back  on  instinct. 


IX 


X 


INTRODUCTION 


My  search  for  information  on  what  makes  a  suc¬ 
cessful  business  man  brought  out  just  one  new  idea. 
I  found  that  for  five  thousand  years  business  men 
had  been  succeeding  by  guess.  Young  men  by  the 
millions  had  started  in  with  a  common  ambition  to 
succeed.  A  small  fraction  of  them  learned,  quite 
by  accident,  the  combination  that  would  work  in 
their  own  particular  calling.  They  succeeded  and 
prospered.  The  others  struggled,  groped,  wore 
themselves  out,  and  died.  The  following  genera¬ 
tion —  the  rich  man’s  son  and  the  poor  man’s  son 
—  started  in  exactly  where  their  fathers  had  started, 
as  far  as  any  real  knowledge  was  concerned.  And 
each  succeeding  generation  was  forced  to  start  at 
the  bottom  without  any  of  the  knowledge  or  experi¬ 
ence  gained  by  those  who  had  experimented  and 
struggled  for  hundreds  of  years  before. 

This  profitless  repetition  showed  the  need  for 
some  sort  of  organized  knowledge  on  the  most  im¬ 
portant  of  all  businesses  —  that  of  making  a  living. 
Hence,  I  kept  at  work  on  the  problem. 

But,  to  get  back  to  our  story  —  Professor  Swain 
and  I  were  studying  those  charts  on  wages,  prices, 
bank  clearings,  and  numerous  business  matters  for 
long  periods  of  years.  We  were  trying  to  ac¬ 
count,  on  that  particular  afternoon,  for  a  sort  of 
wave  motion  that  seemed  to  run  through  each  of 
them. 

Quite  suddenly  one  of  us  said,  cc  I  wonder  if  Sir 
Isaac  Newton’s  law  of  action  and  reaction  has  any- 


INTRODUCTION 


XI 


thing  to  do  with  this  economic  wave  motion.”  The 
idea  seemed  plausible.  As  a  result,  I  went  to  Eng¬ 
land  and  visited  Cambridge,  Newton’s  home  to.wn, 
studying  his  early  books  and  writings  in  an  effort 
to  learn  something  of  his  discoveries  and  the  possi¬ 
bility  of  their  application  to  the  problem. 

After  spending  several  months  among  his  books 
and  notes,  I  ran  across  the  following  in  “  Sir  Isaac 
Newton’s  Philosophical  Discoveries,”  published  by 
McLaurin,  in  1748: 

“  The  establishing  of  the  equality  of  action  and 
reaction,  even  in  those  powers  which  seem  to  sur¬ 
pass  mechanism  and  to  be  more  immediately  de¬ 
rived  from  Him,  seems  to  be  an  indicator  that  those 
powers,  while  they  derive  their  efficacy  from  Him, 
are,  however,  in  a  certain  degree,  circumscribed 
and  regulated  in  their  operations  by  mechanidal 
principles.” 

That  settled  it.  I  went  to  work  in  earnest,  and 
within  a  year  had  reduced  the  various  facts  in  busi¬ 
ness  to  a  single  chart.  This  chart  illustrated  New¬ 
ton’s  law  as  it  applies  to  business,  and  also  made  it 
possible  to  forecast  the  various  features  of  business 
progress  —  the  seasons  of  prosperity,  decline,  de¬ 
pression,  and  improvement  —  with  remarkable  ac¬ 
curacy. 

The  law  has  since  been  applied  to  hundreds  of 
factors,  involving  almost  every  phase  of  the  business 
world.  It  has  been  applied  to  the  stock  market  to 
solve  the  enigma  of  fluctuation,  and  it  has  been 


J 


INTRODUCTION 


«  • 

Xll 

worked  out  in  forecasting  the  trend  of  human 
relations. 

The  tiny  business  started  in  an  old  attic  in  Welles¬ 
ley,  Massachusetts,  to  make  and  market  these  fore¬ 
casts  for  the  guidance  of  business  men  and  investors, 
has  grown  during  the  last  twenty  years  into  a 
world-wide  organization,  with  a  staff  of  over  300 
economists,  statisticians,  and  assistants.  Its  operating 
revenue  exceeds  $2,000,000  annually,  and  its  re¬ 
ports  are  subscribed  to  by  America’s  leading  execu¬ 
tives  and  investors. 

This  material  success  is  gratifying,  of  course,  but 
I  am  interested  in  it  primarily  as  proof  of  the  sound¬ 
ness  of  a  principle.  It  is  much  more  gratifying  to 
know  that  the  idea  with  which  I  struggled  twenty 
years  ago  has  gradually  been  accepted  by  the  busi¬ 
ness  and  financial  world.  Hence,  activity  in  both 
fields  is  rapidly  coming  out  of  the  tangled  guess¬ 
work  and  is  taking  shape  as  an  exact  science  which 
deals  with  facts,  formulas,  and  certain  results. 

Through  all  this  experiment,  I  have  found  that 
there  are  only  a  few  laws  that  are  really  funda¬ 
mental.  With  these  in  mind,  a  man  can  approach 
almost  any  industrial  or  commercial  problem,  the 
administration  of  almost  any  business  or  the  solution 
of  almost  any  financial  difficulty.  Therefore,  a 
man’s  possibilities  of  success  are  limited  only  by  his 
skill  in  the  application  of  the  principles. 

I  shall  try  to  set  forth  these  few  fundamentals 
of  success,  and  I  hope  that  they  may  make  vour 


INTRODUCTION 


Xlll 


effort  to  succeed  more  fruitful,  that  they  may  save 
you  from  unnecessary  loss  and  grief. 

These  fundamentals  apply  to  every  one  at  some 
stage  of  his  career.  Every  man  who  succeeds  em¬ 
ploys  them,  consciously  or  unconsciously,  whether 
he  knows  it  or  not.  And  it  is  safe  to  say  that  you 
will  “  get  there  quicker  if  you  kno,w  where  you  are 
going.” 

Let  me  also  add  that  since  our  organization  has 
grown  to  such  large  proportions  there  are  many 
connected  with  it  to-day  who  know  more  about  some 
special  lines  of  investigation  than  I  can  ever  hope  to 
know.  Some  of  these  men  have  helped  in  prepar¬ 
ing  portions  of  this  book.  They  are:  Leroy  D. 
Peavey,  C.  N.  Stone,  H.  N.  McGill,  G.  E.  Macll- 
wain,  C.  W.  Wallour,  M.  L.  Morse,  H.  C.  Bald¬ 
win,  P.  S.  Sweetser,  O.  W.  Hill,  and  S.  L.  Sholley. 

R.  W.  B. 

Wellesley  Hills,  Mass. 

October  i,  1922. 


BUSINESS  FUNDAMENTALS 


Chapter  I 

/ 

THE  USE  OF  STATISTICS 

STATISTICS,  as  far  as  we  are  concerned,  will 
be  understood  to  represent  concentrated  infor¬ 
mation  reduced  to  the  exact  basis  of  figures.  This 
gives  us  a  tremendous  field.  Since,  however,  we 
are  interested  only  in  the  statistics  which  affect  busi¬ 
ness  and  investments,  we  will  discard  the  rest  and 
concentrate  on  this  particular  branch.  These  figures 
are  divided  into  two  distinct  classes  —  comparative 
statistics  and  fundamental  statistics. 

Comparative  statistics,  such  as  would  concern  the 
merchant,  for  instance,  relate  to  weight,  quality,  age, 
and  method  of  manufacture  of  the  merchandise  in 
which  he  deals,  together  with  such  trade  figures  as 
are  published  in  trade  journals.  Under  this  heading 
are  also  grouped  the  figures  that  appear  on  the  mer¬ 
chant’s  books  —  the  figures  that  represent  the  in¬ 
side  condition  of  his  particular  business.  From  the 
investor’s  point  of  view,  comparative  statistics  in¬ 
clude  all  particulars  concerning  the  bonded  debt, 
earnings,  gross  business,  and  financial  condition  of 
a  given  property.  They  reflect  inside  conditions. 


2  ’  BUSINESS  FUNDAMENTALS 

These  figures  are  very  necessary  to  bankers  and  in¬ 
vestors  for  comparing  similar  securities  of  different 
companies  and  different  securities  of  the  same  com¬ 
pany. 

Fundamental  statistics,  on  the  other  hand,  reveal 
the  broad  general  situation  that  affects  every  one. 
These  underlying  conditions,  such  as  prices,  money, 
wages,  etc.,  are  of  tremendous  importance  because 
they  affect  a  man’s  business  fundamentally .  They 
govern  the  purchasing  power  of  his  customers,  the 
price  and  supply  of  the  raw  materials  he  uses,  and 
the  living  conditions  of  the  workers  in  his  plant. 

The  importance  of  comparative  statistics  is  gen¬ 
erally  accepted  and  understood.  Hence,  business 
men  now  freely  spend  much  money  for  bookkeepers, 
accountants,  and  office  assistants  to  record  the  nec- 
cessary  data.  Nearly  every  business  compiles  them 
to  a  certain  extent,  and  most  concerns  employ  from 
io  to  50  per  cent,  of  their  office  forces  on  this  work. 

Few  business  men,  on  the  other  hand,  make  any 
systematic  effort  to  collect  data  and  study  funda¬ 
mental  statistics.  Those  who  have  taken  pains  to 
do  so  are  conspicuous  in  their  own  business  com¬ 
munity  for  their  unusual  prosperity  and  what  their 
friends  call  “  good  luck.”  The  reason  is  this: 
fundamental  statistics  are  more  important  to  the 
business  man  than  those  reflected  in  the  figures  on 
his  own  books y  for  fundamental  conditions  have  more 
to  do  with  his  success X f 

A  recent  investigation  by  Professor  David  Friday, 


THE  USE  OF  STATISTICS 


3 

then  in  the  Economics  Department  of  the  University 
of  Michigan,  now  head  of  the  State  School  of  Agri¬ 
culture,  revealed  the  more  or  less  astonishing  fact 
that  the  largest  portion  of  business  profits  and  losses 
results  from  changes  in  fundamental  conditions.  A 
more  recent  investigation  made  by  my  associates, 
covering  over  400  concerns  representing  the  twenty- 
six  leading  branches  of  industry,  revealed  that  57 
per  cent,  of  business  profit  is  the  result  of  changes 
in  fundamental  conditions,  while  but  43  per  cent,  is 
the  result  of  competitive  efficiency. 

The  absolute  necessity  of  keeping  records  and 
compiling  comparative  statistics  within  the  individual 
business  is  already  recognized  and  has  been  adopted 
in  general  practice.  We  will,  therefore,  hencefor¬ 
ward  confine  ourselves  almost  exclusively  to  a  dis¬ 
cussion  of  fundamental  statistics  and  possibilities  of 
profit,  both  in  the  business  field  and  in  the  invest¬ 
ment  markets. 

All  financial  history  has  consisted  of  distinct 
phases,  and,  although  of  different  duration,  each 
phase  has  consisted  of  four  periods  ;  namely,  (1)  a 
period  of  prosperity,  (2)  a  period  of  decline,  (3) 
a  period  of  depression,  (4)  a  period  of  improvement. 
These  always  follow  one  another  in  the  same  se¬ 
quence  and  cause  a  constant  change  of  surface  condi¬ 
tions  with  which  one  must  reckon.  / 

Theoretically,  there  should  be  a  state  where 
everybody  is  busy,  and  nobody  overtrades;  where 
the  cost  of  living  is  reasonable,  and  the  wage  earner 


4  ’  BUSINESS  FUNDAMENTALS 

has  a  chance  to  save  for  old  age  and  to  establish  a 
higher  standard  of  comfort.  As  it  is,  however,  con¬ 
ditions  are  constantly  changing;  prices  are  going  up 
or  coming  down;  the  wage  that  .will  afford  a  com¬ 
fortable  living  to-day  will  hardly  pay  the  rent  next 
year;  orders  come  in  bunches,  so  that  the  manu¬ 
facturer  is  either  worked  to  death  trying  to  get  the 
goods  out  or  is  rushing  around  feverishly  to  get 
enough  orders  to  keep  his  plant  running.  The 
average  business  man,  the  victim  of  these  circum¬ 
stances,  is  going  it  blind  and  is  bound  to  lose. 

Common  sense  dictates  that ,  as  long  as  conditions 
keef  changing  and  are  hound  to  continue  to  do  so, 
the  first  stef  is  that  of  defense . 

The  business  man  must  have  up-to-the-minute 
facts  on  current  conditions  in  every  part  of  his  field 
of  activity.  He  must  know  just  how  things  stand; 
so  that  his  decision  may  apply  to  the  situation  as  it 
is.  For  this  purpose  he  must  use  fundamental 
statistics.  Such  statistics  must  be  collected  from 
many  sources.  The  government  departments  at 
Washington  are  especially  helpful,  supplying  much 
valuable  data  on  conditions  at  regular  intervals. 
Special  commissions,  from  time  to  time,  investigate 
fundamental  conditions  in  one  field  or  another  and 
and  issue  enlightening  reports.  Then  there  are  the 
special  libraries,  public  libraries,  questionnaires,  per¬ 
sonal  correspondence,  trade  publications,  trade  asso¬ 
ciation  reports,  clipping  bureaus,  surveys  and  special 
reports  in  the  field. 


THE  USE  OF  STATISTICS 


/ 


The  constant  changes  in  fundamental  conditions, 
which  harass  and  befuddle  the  average  business  man, 
offer  a  remarkable  opportunity  for  profit,  provided 
one  can  tell  what  the  next  change  will  be  and  when 
it  will  take  place.  These  two  factors  will  be  dis¬ 
cussed  in  succeeding  chapters;  but,  before  we  close 
this  discussion  of  statistics  and  their  possibilities, 
let  us  consider  the  dollar-and-cents  value  of  the 
time  spent  in  studying  them. 

The  amount  of  money  that  can  be  made  by  the 
study  of  such  statistics  is  limited  only  by  the  origi¬ 
nal  capital  and  the  number  of  years  the  study  is 
/continued. 


Comparative  statistics  treat  of  comparative  condi¬ 
tions  and  are  used  for  selecting  securities  and  com¬ 
modities  that  are  absolutely  safe  and  that  have  the 
greatest  prospect  of  increase  in  market  value  under 
fixed  market  conditions.  Fundamental  statistics 
treat  of  underlying  conditions  and  are  employed  for 
determining  these  general  market  conditions  and 
whether  or  not  it  is  wise  to  purchase,  or  to  sell,  or 
to  do  neither.  Investors  use  these  data  to  guide 
them  in  purchasing  securities  only  when  they  are 
low,  holding  them  for  from  two  to  four  years  until 
they  are  high,  and  then  selling  them  and  depositing 
the  proceeds  in  a  bank.  They  leave  the  money  on 
deposit  for  from  two  to  four  years,  until  the  same 
securities  again  sell  low,  when  they  withdraw  the 
money  and  again  purchase  the  same  or  other  high- 
grade  securities,  j 


6 


I 


BUSINESS  FUNDAMENTALS 


Many  such  investors  double  their  money  every 
few  years,  with  practically  no  risk  and  with  very 
little  trouble.  By  a  study  of  these  fundamental 
statistics  some  individuals  with  little  risk  and  with¬ 
out  any  marginal  purchases,  but  by  purchasing  out¬ 
right  high-grade,  dividend-paying  securities,  have 
turned  an  investment  of  $5000  into  $200,000  in 
about  twenty  years.  When  one  realizes  the  mean¬ 
ing  of  this  —  that  an  investment  of  $25,000  grows 
automatically  to  $1,000,000  within  twenty  years 
—  the  value  of  fundamental  statistics  is  apparent. 

If  one  is  not  strictly  an  investor  and  is  willing, 
under  a  broker’s  guidance,  to  take  advantage  also 
of  certain  intermediate  movements  which  come  once 
or  twice  a  year,  greater  profits  are  sometimes  ob¬ 
tained.  But,  of  course,  this  latter  method  involves 
risk.  Such  operations  are  not  based  on  statistics. 

Many  brokers  urge  customers  to  take  advantage 
of  declines,  recommending  short  selling  in  periods 
of  great  activity  and  prosperity  and  also  purchasing 
on  margin  during  periods  of  depression.  But  short 
selling  and  margin  purchasing  involve  other  ele¬ 
ments  of  risk,  and  the  investor  taking  such  risks 
becomes  a  gambler . 

If  marginal  purchases  are  undertaken,  the  mar¬ 
gins  should  be  large  —  from  30  to  40  per  cent. 
Moreover,  instead  of  selling  short,  the  investor  may 
buy  “  puts  ”  for  three  months,  or,  if  possible,  for  a 
longer  time.  These  puts  often  allow  the  holder 
to  make  nearly  as  much  profit  as  if  he  had  sold  the 


I 


THE  USE  OF  STATISTICS  7 

stock  short.  And  the  loss  he  may  sustain  is  limited 
to  the  price  of  the  puts. 

The  point,  however,  that  this  book  would  empha¬ 
size  is  that  a  knowledge  of  fundamental  conditions 
will  enable  the  business  man  to  materially  increase 
his  profits  of  any  business  without  the  risks  involved 
in  ordinary  speculation.  The  same  information  will 
enable  the  investor  to  multiply  an  original  invest¬ 
ment  of  a  thousand  dollars  to  a  very  sizable  estate 
in  sound  securities  with  very  little  risk  and  with¬ 
out  marginal  purchases  or  short  sales.  The  requi¬ 
sites  are  a  constant  study  of  comparative  and  funda¬ 
mental  statistics  and  sufficient  self-control  to  act 
only  in  accordance  with  what  those  statistics  clearly 
indicate  and  to  listen  neither  to  the  optimism  nor 
pessimism  supplied  by  the  daily  papers  and  by  the 
many  individuals  who  are  always  giving  free 
advice. 

The  above  principles  apply  to  bonds  as  truly  as 
to  stocks,  and  should  be  studied  by  the  investors 
who  purchase  only  bonds,  as  well  as  those  who  pur¬ 
chase  stocks.  Although  bonds  do  not  fluctuate  so 
widely  as  stocks  and  for  this  reason  do  not  present 
so  great  an  opportunity  for  profit,  yet  the  minimum 
interest  yield  of  good  bonds  is  absolutely  fixed, 
which  is  not  true  of  even  the  most  conservative 
stocks.  Bonds  are  especially  recommended  to  per¬ 
sons  dependent  upon  the  income  derived  from  their 
investments.  Furthermore,  the  writer  is  inclined  to 
advise  that  all  persons  should,  always  have  a  'portion 


8 


BUSINESS  FUNDAMENTALS 


of  their  principal  on  deposit  in  a  banky  or  in  high- 
grade  bonds ,  short-term  notesy  or  commercial  paper . 

Merchants  who  never  buy  or  sell  securities  use 
these  data  with  equal  profit.  Fundamental  statis¬ 
tics  clearly  show  the  merchant  when  to  buy  and  in¬ 
crease  his  stock  of  goods,  and  when  to  cut  prices  and 
reduce  his  stock.  They  also  enable  the  merchant 
to  forecast  money  conditions  in  order  that  he  may 
intelligently  decide  whether  to  borrow  to  allow  cus¬ 
tomers  further  credit,  or  to  reduce  his  loans  and 
the  indebtedness  of  his  customers.  Moreover,  at 
all  times,  these  figures  show  the  merchant  the  con¬ 
dition  of  business  throughout  the  country ;  so  that 
he  knows  whether  the  growth  or  contraction  of  his 
business  is  proportional  to  that  of  competitors. 

f^Upon  careful  thought,  it  must  be  admitted  that 
the  fortunes  of  American  merchant  princes  must 
have  been  created  by  a  knowledge  of  these  facts, 
rather  than  simply  selling  to  the  trade  at  a  nom¬ 
inal  profit.  Therefore,  the  proper  use  of  funda¬ 
mental  statistics  not  only  insures  a  merchant  against 
losses,  but  should  also  be  as  profitable  to  him  as 
to  the  investor,  enabling  him  to  double  and  triple 
his  capital  every  few  years.  Such  ideas  of  the  value 
of  statistics  should,  therefore,  be  especially  inter¬ 
esting  to  the  small  merchant  with  capital  of,  say, 
only  $10,000.  For  there  is  no  reason  why,  with 
fundamental  statistics  as  an  aid,  his  capital  should 
not  automatically  increase  to  $250,000  within 
twenty  years. 


THE  USE  OF  STATISTICS  9 

Not  only  do  students  of  fundamental  statistics 
make  large  fortunes  for  themselves  and  their  fol¬ 
lowers,  but  such  students  are  the  very  best  patriots 
a  country  can  produce.  The  true  patriot  is  he  who 
studies  fundamental  statistics  and  who  acts  in  ac¬ 
cordance  with  what  they  teach,  buying  very  heavily 
during  the  days  of  panic  and  great  depression.  The 
real  traitor  to-day  is  he  who  urges  on  or  follows  the 
crowd  during  a  period  of  over-expansion,  and  then 
locks  up  his  money  and  refuses  to  extend  aid  during 
the  dark  days  when  banks  are  failing,  railroads  are 
becoming  bankrupt,  and  the  wheels  of  industry  are 
stopping. 

Therefore,  every  additional  person  who  enters 
into  this  work  will  aid  in  making  the  next  period  of 
over-expansion  less  riotous  and  the  next  depression 
less  severe. 


V 


Chapter  II 

FUNDAMENTALS  AND  WHAT 
THEY  FORETELL 

X 

I  HAVE  already  defined  comparative  and  funda-  • 
mental  statistics.  A  study  of  the  latter  reveals 
the  exact  condition  of  the  country  at  any  given  time, 
and  also  —  by  application  of  the  law  of  action  and 
reaction  —  the  trend  of  business.  The  business  man 
may  study  hundreds  of  pages  of  data  and  spend 
vast  quantities  of  time  and  money  in  business,  but 
if  he  does  not  have  the  fundamental  facts  he  is 
like  a  small  boat  on  the  ocean  when  the  storm  comes. 

It  is  necessary,  of  course,  to  go  into  exhaustive  re¬ 
search  on  matters  pertaining  to  one’s  line  of  busi¬ 
ness.  Only  those  who  are  doing  this  in  the  most 
thorough  manner  have  made  a  success.  But  this 
study  alone  is  not  sufficient ;  men  who  have  pursued 
this  policy  have  become  very  wealthy,  only  to  lose 
everything  in  a  few  months  simply  because  they  did 
not  know  fundamentals.  They  did  not  know  that 
their  own  business  was  dependent  upon  the  general 
trend  of  economic  conditions.  When  the  funda¬ 
mentals  changed  —  fundamentals  which  were  sure 
to  affect  all  business  —  they  did  not  know  it  and 
were  caught  napping.  I  have  often  seen  an  entire 
business,  the  result  of  the  accumulation  of  years, 


IO 


FUNDAMENTALS,  WHAT  THEY  FORETELL  II 

collapse  like  a  house  of  cards. 

Some  years  ago  I  made  an  investigation  of  one 
hundred  leading  industries  to  see  if  they  had  any 
special  secret  of  success.  I  soon  found  that  there 
was  no  particular  group  which  had  a  distinct  advan¬ 
tage  over  the  other  groups.  Nor  was  heredity,  en¬ 
vironment,  education,  or  any  other  such  helpful 
factor  sufficient  to  make  the  great  difference  between 
failure  and  success.  It  is  true  that  certain  funda¬ 
mentals  of  character  were  necessary,  but  I  became 
convinced  that  character  alone  was  not  enough.  It 
was  evident  that  the  outstanding  factor  which  marked 
the  success  of  these  great  captains  of  industry  was 
their  methods  of  operation. 

Not  content  with  having  a  large  group  of  engi¬ 
neers  and  .  experts  continually  investigating  along 
the  lines  of  their  respective  industries,  they  also  had 
statistical  departments  which  continually  laid  before 
them  the  trends  of  all  the  leading  trade  indicators. 
By  such  investigation  they  could  at  all  times  be  rea¬ 
sonably  sure  of  the  direction  in  which  business  as 
a  whole  was  traveling. 

Unlike  their  competitors,  they  refused  to  “  guess.” 
They  studied  the  fundamental  statistics  of  the  coun¬ 
try.  They  believed  what  Colonel  Ayres,  vice-presi¬ 
dent  of  the  Cleveland  Trust  Company,  has  stated 
so  pertinently  to  the  business  men  of  the  country: 

“  The  most  important  single  piece  of  business  informa¬ 
tion  that  the  man  of  affairs  can  have  is  that  which  tells 
him  at  what  stage  of  the  changing  course  of  business  he  is 
at  any  given  time.” 


12 


BUSINESS  FUNDAMENTALS 


There  are  a  large  number  of  subjects  which 
should  be  studied  in  order  to  gauge  the  situation 
correctly,  but  the  sifting  process  of  years  has  re¬ 
duced  the  number  which  are  of  practical  and  definite 
use  for  the  business  man.  In  selecting  these,  the 
following  characteristics  are  necessary:  (i)  com¬ 
prehensive  and  authoritative  figures  on  the  desired 
subject  must  be  obtainable  $  (2)  the  figures  must 
extend  over  a  sufficient  number  of  years  to  show  the 
business  trend.  This  process  of  selection  has  given 
us  about  twenty-five  or  thirty  subjects  on  which 
reliable  data  for  the  study  of  business  trends  in 
the  United  States  can  be  obtained. 

A  fundamental  subject  is  one  which  shows,  to 
some  degree,  the  underlying  conditions  of  the  coun¬ 
try.  The  keenest  and  most  successful  merchants 
and  investors  have  for  years  studied  such  subjects, 
thereby  eliminating  losses  and  making  very  large 
profits,  as  the  business  seasons  have  rolled  around. 

Some  years  ago  I  was  on  a  trip  to  England  inter¬ 
viewing  the  great  merchants  and  other  successful 
business  men  of  that  famous  trading  country.  I 
discussed  with  them  at  length  the  comparative  data 
and  current  positions  of  leading  corporations. 

“  This  is  all  very  well  and  quite  essential,”  said 
they  at  last,  “  but  what  we  want  and  what  the  mer¬ 
cantile  world  wants  is  to  know  how  the  United 
States  is  headed.  We  buy  your  railroads,  your  mines 
and  your  industrials  —  everything  is  booming.  We 
turn  our  backs  for  a  moment,  and  everything  has 


FUNDAMENTALS,  WHAT  THEY  FORETELL  1 3 

plunged  into  a  cataclysm.  If  you  will  study  the  fun¬ 
damentals  over  there  as  we  study  them  here,  you 
can  perform  a  most  wonderful  service.” 

That  set  me  thinking}  I  began  an  investigation  of 
the  available  information  and  after  months  of  re¬ 
search  selected  and  arranged  the  statistics  on  certain 
important  subjects,  the  number  of  which  has  gradu¬ 
ally  been  enlarged.  For  convenience,  these  funda¬ 
mental  subjects  may  be  grouped  under  twelve 
headings,  as  follows: 

/.  New  Construction  and  Real  Estate: 

i  . 

This  will  easily  be  recognized  as  one  of  the  lead¬ 
ing  indicators  of  the  country’s  progress.  The  build¬ 
ing  industry  represents  an  annual  outlay  of  over 
$3,000,000,000!  Consider  residential  building,  for 
example:  about  100,000  residences  are  needed  an¬ 
nually.  The  home  is  the  first  unit  of  society  and  is 
a  foundation  stone  in  the  welfare  of  the  people. 
Hence,  construction  of  dwelling  houses  and  accom¬ 
panying  real  estate  operations  are  of  vital  impor¬ 
tance.  When  business  is  booming,  when  everybody 
is  employed  and  there  is  plenty  of  money  in  circu¬ 
lation,  the  tendency  is  for  families  to  spread  out, 
thus  creating  a  greater  demand  for  homes.  When 
business  gets  dull  and  depression  overtakes  us,  the 
reverse  is  true}  consolidation  of  families  is  the  rule 
and  a  surplus  of  houses  results. 

The  rental  situation  is  closely  related  to  this  sub¬ 
ject.  The  more  business  expands  and  the  higher 


14  BUSINESS  FUNDAMENTALS 

rentals  go,  the  greater  is  the  tendency  toward  the 
building  and  owning  of  homes  by  the  people.  This 
was  most  markedly  shown  during  the  period  of 
high  prices  near  the  close  of  the  European  War. 

Factory  and  similar  construction  involves  about 
$300,000,000  annually  and  is  very  intimately  con¬ 
nected  with  the  country’s  mercantile  progress.  As 
civic  standards  are  raised,  municipal,  state  and  other 
government  building,  as  well  as  institutional  proj¬ 
ects,  absorbs  a  vast  amount  of  capital.  Of  late, 
there  has  been  a  studied  tendency,  and  rightly  so,  to 
do  as  much  as  possible  of  this  sort  of  construction 
during  periods  of  depression  in  order  to  give  em¬ 
ployment  to  those  who  would  otherwise  be  out  of 
work. 

Real  estate  operations,  including  certain  agricul¬ 
tural  developments,  involve  millions  of  dollars 
every  year  and  form  the  basis  of  one  of  the  greatest 
of  the  country’s  industries.  Under  the  above  cap¬ 
tion  may  also  be  grouped  railroad  construction, 
highway  building,  and  the  construction  of  water¬ 
ways.  For  years  new  railroad  construction  was  one 
of  the  important  items  of  activity  —  especially  from 
1850  to  1890.  The  great  West  was  being  devel¬ 
oped,  trunk  lines  pushed  their  way  across  to  the 
Pacific  Coast,  and  a  network  of  railroads  traversed 
the  states  in  all  directions. 

Of  late  years  other  construction  statistics  have 
vied  with  railroad  figures  for  the  place  of  first  im¬ 
portance,  but  the  vast  terminals  and  track  develop- 


FUNDAMENTALS,  WHAT  THEY  FORETELL  1 5 

ments  are  still  a  very  large  item.  And,  since  the 
advent  of  the  automobile  and  motor  truck,  highway 
construction  has  also  become  a  very  important 
matter.  That  is  why  the  various  construction  proj¬ 
ects  are  something  which  must  be  watched  with  the 
greatest  care  by  the  business  man.  Closely  allied 
with  such  studies  are  the  data  on  the  output  of  the 
steel  companies;  cement,  brick  and  lumber  produc¬ 
tion;  and  similar  statistics. 

II.  Bank  Clearings  and  Check  Transactions: 

Bank  clearings  are  one  of  the  very  best  indicators 
of  the  real  condition  of  business.  The  broad  signifi¬ 
cance  of  bank  clearings  is  revealed  by  the  total  for 
1920  of  $450,000,000,000.  They  furnish  probably 
the  best  single  trend  indicator  available;  although 
we  cannot  rely  on  any  one  subject  without  risk  of 
failure.  In  every  large  city  and  in  many  smaller 
ones  there  is  a  clearing  house  where  bank  represen¬ 
tatives  meet  every, day  to  exchange  checks  drawn  on 
one  another  and  settle  balances. 

Records  of  these  transactions  have  for  years 
been  most  carefully  studied.  Inasmuch  as  in  New 
York  City  the  stock  and  bond  business  is  of  such 
large  volume,  it  is  best  to  study  two  distinct  sets 
of  clearing  figures:  (i)  clearings  excluding  New 
York  City;  (2)  total  clearings  of  the  country.  With 
the  advent  of  the  Federal  Reserve  System,  more 
comprehensive  figures  were  obtainable.  In  August, 
1916,  the  Federal  Reserve  Board  extended  clearings 


1 6  BUSINESS  FUNDAMENTALS 

facilities  to  many  outlying  districts.  Most  of  these 
banks  now  report  directly  to  the  Federal  Reserve 
Board  the  checks  drawn  each  week.  This  gives  a 
record  of  u  Check  Transactions  ”  —  much  more 
complete  than  the  “  Clearings  ”  method. 

Every  bill  you  pay  by  check  is  thus  reported  to 
the  Federal  Reserve  System.  As  a  very  large  vol¬ 
ume  of  our  business  is  paid  for  by  check,  you  can 
see  at  once  what  a  valuable  index  of  business  activity 
this  record  is.  Of  course,  these  figures  do  not  show 
the  actual  amount  of  goods  which  change  hands,  as 
the  size  of  the  checks  is  affected  by  price  variations. 
Ordinarily,  price  changes  do  not  radically  affect  this 
record,  but  at  times,  especially  during  a  great  war, 
commodity  prices  reach  such  abnormal  levels  that 
the  variation  is  very  marked. 

During  these  abnormal  periods,  then,  commodity 
and  security  price  levels  must  be  very  carefully 
noted  when  one  is  studying  this  barometer  of  busi¬ 
ness.  Remember  they  represent  the  total  amount 
of  business  done  by  the  nation,  just  as  “gross  sales” 
represent  the  total  amount  of  business  done  by  a 
company;  and  this  is  what  the  whole  nation  figures 
on  —  the  dollar  value  of  business  transactions. 

III.  Business  Failures: 

Failures,  both  in  number  and  amount,  are  a  good 
barometer  of  trade  conditions.  By  ascertaining  each 
month  the  average  number  of  concerns  in  business 
and  the  number  that  have  failed,  the  percentage  of 


Statistical  Tables 


FUNDAMENTALS,  WHAT  THEY  FORETELL 


^  ^  VI 

8  8  8  8  8  8  8 


©5  gft888  88 


I  8  BUSINESS  FUNDAMENTALS 

failures  may  also  be  determined.  Contrary  to  the 
ordinary  impression,  it  is  too  few  failures,  rather 
than  too  many,  that  foretell  disaster  and  panic. 
For  instance,  the  records  show  that  in  1912  and 
1913  everything  was  running  along  quietly  and 
smoothly.  Nobody  was  scared,  and  failures  were  at 
a  minimum,  but  in  1914  we  ran  rapidly  into  a  crisis. 
The  failure  of  the  great  house  of  Claflin  &  Com¬ 
pany  which  shocked  the  business  world  really 
marked  the  bottom  of  this  depression. 

The  same  was  true  in  the  post-war  period.  In 
1918  and  1919  people  felt  secure  when  failure  lia¬ 
bilities  were  only  $  100,000,000  —  almost  the  lowest 
on  record  —  contrasted  with  a  high  of  $700,000,- 
OOO.  But  how  dismayed  were  these  same  unthink¬ 
ing  people  in  the  awful  business  decline  of  1920 
which  came  within  a  few  months>  time!  Since  then, 
not  only  have  hundreds  of  our  large  business  houses 
been  wiped  out,  but  thousands  of  others  have  been 
crippled  and  carried  along  under  great  stress  by  the 
banks.  At  such  times  inventories  which  appear 
ample  dissolve  to  nothing  when  price-cutting  and 
panic  develop. 

Each  depression  has  its  own  peculiar  type  of  busi¬ 
ness  mortality.  In  1907  large  banks,  especially 
those  of  New  York  City,  went  by  the  board;  1903 
was  a  so-called  “rich  man’s  panic”;  1884  was 
marked  by  many  railroad  failures;  and  some  of  the 
earlier  crises  were  accompanied  by  gigantic  real 
estate  cataclysms. 


FUNDAMENTALS,  WHAT  THEY  FORETELL  1 9 

After  such  a  storm  of  failures  the  air  is  cleared 
and  the  way  is  opened  for  sounder  conditions.  The 
time  to  be  frightened  is  before  the  storm  comes, 
when  failures  are  very  few  in  number. 

The  accompanying  chart  shows  the  close  relation 
between  failures  and  commodity  prices.  Greatest 
caution  is  required  when  prices  are  high  and  failures 
are  fewest.  At  such  times  optimism  rules,  and  only 
the  wise  ones  begin  to  clean  up  doubtful  accounts 
and  prepare  for  trouble.  The  forehanded  credit 
man  can  collect  money  and  still  keep  his  friends. 
But,  if  he  waits  until  the  storm  breaks,  he  not  only 
cannot  make  collections  but  loses  his  friends  as  he 
presses  for  payment. 

IV.  Labor  Conditions: 

The  labor  situation  will  be  recognized  at  once  by 
careful  students  as  a  vital  factor  in  the  life  of  the 
country.  Approximately  40  per  cent,  of  the  total 
population  of  the  United  States  are  engaged  in  in¬ 
dustry  of  one  sort  or  another.  Wages,  unionization, 
strikes  and  similar  developments  are  of  the  utmost 
importance.  Even  the  increasing  prevalence  of  ma¬ 
chine  methods  does  not  eliminate  this  subject  from 
our  calculations  5  as  the  business  of  the  country  in¬ 
creases,  the  human  element  becomes  more  and  more 
important. 

There  was  a  time  when  the  comparatively  few 
employers  knew  their  employees  intimately.  Later, 
the  restless,  selfish,  money-making  age  resulted  in 


IMP,  ,.1880,  ,  ,  1885  Ifl90  18,9,5,  TOO  ,  1905 


I 


FUNDAMENTALS,  WHAT  THEY  FORETELL  2 1 


employers’  forgetting  that  labor  is  something  more 
than  a  “  commodity.”  But  recent  years  have 
marked  the  beginning  of  a  reaction  from  such  short¬ 
sighted  philosophy. 

Moreover,  the  standard  of  living  is  rising  in 
civilized  countries,  and  nowhere  more  than  in  the 
United  States.  In  reality,  the  human  relation,  es¬ 
pecially  in  American  business,  is  the  most  critical  of 
any.  If  suitable  figures  could  be  obtained,  we  would 
see  it  in  startling  relief.  It  is  to  be  deplored  that 
more  data  on  this  subject  are  not  obtainable.  One 
of  the  best  sources  has  heretofore  been  a  tabulation 
of  immigration  and  emigration  statistics.  When 
steamers  are  packed  with  immigrants  from  foreign 
shores,  this  suggests  excellent  business  conditions  in 
the  United  States  and  high  prices  for  labor.  This, 
however,  like  everythng  else,  can  be  overdone, 
and  too  large  arrival  figures  foretell  a  depression. 
Conversely,  when  departures  are  large  in  number 
and  when  immigrant  traffic  is  small,  it  is  a  good 
sign  that  United  States  business  can  get  no  worse. 
The  tide  generally  turns  upward  when  this  condi¬ 
tion  prevails. 

For  years  these  arrivals  and  departures  have  been 
carefully  tabulated  by  the  Government.  Prior  to 
the  World  War  annual  immigrant  arrivals  averaged 
around  1,000,000.  At  times  legislative  influences 
have  prevailed,  tending  to  restrict  or  increase  immi¬ 
gration  in  accordance  with  the  trend  of  feeling 
throughout  the  country.  During  the  World  War, 


22 


BUSINESS  FUNDAMENTALS 


for  instance,  there  were  severe  restrictions  here,  as 
well  as  drastic  regulations  in  Europe,  which  prac¬ 
tically  stopped  the  flow  of  labor  to  this  country. 
Later,  restrictive  measures  were  enacted  for  the 
purpose  of  keeping  out  undesirable  radicals  and 
other  agitators.  During  such  periods  as  the  fore¬ 
going,  statistics  on  immigration  do  not  adequately 
represent  the  real  business  situation.  ^ 

As  a  substitute,  it  would  be  very  desirable  if  suffi¬ 
cient  figures  could  be  obtained  regarding  employ¬ 
ment  and  wage  scales  for  the  country  as  a  whole, 
and  for  individual  localities.  Already  some  pro¬ 
gressive  work  has  been  done  by  such  states  as  New 
York  and  Massachusetts,  but  there  is  room  for  great 
improvement.  Of  course,  there  are  the  Govern¬ 
ment  census  figures  for  the  intermediate  five-year 
period,  but  in  order  to  be  of  sufficient  use  to  the 
business  man  such  data  must  be  more  frequent. 
Eventually  further  figures  from  labor  unions,  states, 
municipalities,  etc.,  may  be  available.  For  this 
reason,  considerable  attention  is  now  being  given  to 
figures  showing  the  “  Percentage  of  Labor  Em¬ 
ployed  ”  and  “  Pay  Rolls  in  Manufacturing  Estab¬ 
lishments  ”  in  the  state  of  New  York. 

Strike  figures,  if  obtainable,  would  be  an  excellent 
indicator.  The  Government  for  a  term  of  years 
kept  a  partial  record  which  was  very  valuable,  not¬ 
withstanding  its  meagerness.  This  record  showed 
a  sympathetic  movement  with  the  changes  in  business 
from  a  period  of  depression  to  over-expansion, 


FUNDAMENTALS,  WHAT  THEY  FORETELL  23 

and  vice  versa.  Such  figures  are  no  longer  being 
tabulated  by  the  Government,  but  my  organization 
has  been  for  some  years  uniformly  tabulating  a  cer¬ 
tain  proportion  of  strike  statistics.  Such  tables  will 
become  increasingly  important. 

V.  Money  Conditions: 

This  includes  banking  figures,  reports  of  the 
Comptroller  of  the  Currency,  money  in  circulation 
per  capita,  etc.  Since  money  is  used  in  all  trade,  it  is 
one  of  the  most  sensitive  indicators.  All  the  items 
in  the  bank  statement  are  worth  watching ;  but  the 
subject  in  which  I  am  most  interested  is  bank  loans. 
It  is  of  the  highest  importance  to  know  how  much 
business  concerns  and  individuals  are  borrowing. 
During  times  of  over-expansion  the  majority  not 
only  spend  all  they  make,  but  utilize  all  the  credit 
they  can  command.  During  such  periods  an  inordi¬ 
nate  gain  in  bank  loans  causes  temporary  business 
activity,  but  a  decided  fundamental  weakness.  Con¬ 
versely,  in  times  of  depression,  the  very  best  sign 
is  to  see  bank  loans  being  reduced.  This  means  that 
the  u  spree  ”  is  over  and  people  are  getting  back  to 
sanity  again. 

Two  sources  of  loan  statistics  are  readily  available. 
One  is  the  “  loan  and  discount  ”  item  reported  each 
week  by  the  leading  member  banks  of  the  Federal 
Reserve  System,  a  reliable  measure  of  the  increase 
or  decrease  in  the  total  borrowings  of  the  whole 
country.  The  second  is  the  report  of  “  bills  dis- 


24 


BUSINESS  FUNDAMENTALS 


counted”  by  the  twelve  Federal  Reserve  banks. 
When  a  local  bank  is  unable  to  supply  its  customers 
with  loans,  it  may  rediscount  certain  of  the  notes 
it  holds  with  its  Federal  Reserve  bank.  In  a  gen¬ 
eral  way,  the  item,  “  bills  discounted,”  indicates  the 
extent  to  which  the  member  banks  have  had  to  call 
upon  the  reserve  banks  for  assistance. 

In  judging  the  banking  situation,  we  must  take 
into  account  the  supply  of  money,  or  credit,  which 
the  banks  have,  as  well  as  the  demand  for  it.  The 
rental  price  of  money  (interest  rates),  like  the  rent 
of  anything  else,  is  governed  by  the  law  of  supply 
and  demand.  The  supply  of  money  is  best  shown 
by  the  ratio  of  the  banks5  reserves  to  their  liabilities. 

Since  inauguration  of  the  Federal  Reserve  Sys¬ 
tem,  bank  reserves  are  held  chiefly  by  the  Federal 
Reserve  banks.  If  it  were  not  for  the  effect’  of  gold 
imports,  perhaps  it  would  be  necessary  to  watch  only 
the  supply  of  money,  or  reserves,  in  the  banks. 
Heavy  imports  of  gold,  however,  may  temporarily 
inflate  reserves  without  offering  a  safe  basis  for 
credit  extension.  Any  increase  in  what  is  called  the 
a  reserve  ratio,55  therefore,  is  always  carefully  ana¬ 
lyzed  by  the  student  of  fundamentals. 

V 7.  Foreign  T rade : 

The  principal  divisions  of  this  subject  are  exports 
and  imports  of  merchandise,  and  the  balance  of 
trade.  Foreign  trade  statistics  of  any  country  rep¬ 
resent  the,  business  done  with  the  outside  world. 


FUNDAMENTALS,  WHAT  THEY  FORETELL  25 

The  existence  of  many  countries  now  practically  de¬ 
pends  on  their  trade  with  other  nations.  Great  Brit¬ 
ain,  for  instance,  is  essentially  a  foreign  trading 
country.  The  United  States  is  in  a  different  position  5 
we  are  a  younger,  and  a  growing  nation,  with  land 
and  resources  sufficient  to  make  us  more  or  less,  self- 
contained.  But  we  are  beginning  to  emerge  from 
this  provincial  attitude,  and  our  future  will  be  dif¬ 
ferent  in  this  respect. 

The  foreign  trade  of  a  country  bears  the  same 
relation  to  the  nation  as  a  whole,  as  the  income  and 
expense  of  an  individual  bears  to  the  financial  con¬ 
dition  of  that  individual.  One  who  for  any  length 
of  time  spends  more  money  than  he  receives  is  sure 
eventually  to  have  trouble.  This  is  the  difficulty 
which  confronts  Europe.  Likewise  it  presents  a 
problem  for  America. 

Our  exports  are  to  some  extent  a  seasonal  propo¬ 
sition.  Cotton,  grain,  and  other  crop  shipments  to 
Europe  every  fall  reach  substantial  proportions. 
Copper,  iron,  and  other  raw  material  exports,  as  well 
as  manufactured  items,  also  swell  the  total.  While 
exports  are  only  a  small  proportion  of  domestic  ac¬ 
tivity,  in  boom  times  they  do  represent  the  top  layer 
of  our  total  trade,  which  layer  is  desirable  for  suc¬ 
cessful  business. 

« 

On  the  other  side  of  the  ledger  are  goods  brought 
into  the  country  from  foreign  shores.  These  are 
known  as  imports.  Generally  speaking,  no  country 
can  sell  goods  without  buying,  unless  it  is  a  great 


26 


BUSINESS  FUNDAMENTALS 


creditor  nation  to  which  the  rest  of  the  world  must 
pay  interest.  There  must  be  an  interchange  of 
goods  and  the  up-to-date  trading  countries  expect  to 
import  as  well  as  export  in  order  to  keep  the  balance 
of  trade  properly  adjusted. 

Large  exports  during  the  coming  years  will  be 
favorable  to  business  only  when  they  are  equalled 
or  exceeded  by  our  imports.  A  heavy  excess  of  ex¬ 
ports  cannot  in  the  long  run  be  considered  a  good 
condition.  Therefore,  in  interpreting  foreign  trade 
statistics,  it  is  essential  that  imports  and  exports  be 
considered  together.  Strange  as  it  may  seem,  an  in¬ 
crease  in  imports  is  fundamentally  a  favorable  sign 
for  the  future.  A  proportionate  increase  in  imports 
and  exports  indicates  improving  business,  while  a 
decrease  in  both  indicates  decline. 

VII.  Gold  Movements  and  Money  Rates: 

This  subject  really  includes  gold  exports  and  im¬ 
ports,  domestic  and  foreign  exchange,  domestic  and 
foreign  money  rates,  etc.  Gold  is  the  basis  of 
exchange  for  all  leading  countries.  It  starts  from 
the  mines  and  is  passed  through  its  leading  distribu¬ 
tion  centers  to  those  who  pay  the  highest  price  for 
it.  After  distribution,  it  flows  from  one  part  of  the 
world  to  another,  according  to  supply  and  demand. 

The  balance  of  gold  imports  or  exports  is  gov¬ 
erned  primarily  by  our  foreign  trade  and  is  an 
indicator  of  the  country’s  credit  position.  Of  course, 
gold  may  be  artificially  imported  by  the  banks. 


FUNDAMENTALS,  WHAT  THEY  FORETELL  27 

They  have  even  been  able  to  postpone  panics  tem¬ 
porarily  by  such  methods.  Ordinarily,  however, 
money,  like  water,  seeks  its  own  level.  That  is  to 
say,  if  money  rates  are  low  in  the  United  States  but 
high  in  Europe,  gold  will  gradually  be  shipped  to 
the  high  bidders  in  Europe.  As  this  movement 
continues,  foreign  rates  will  ease  and  United  States 
money  rates  will  strengthen.  It  is  for  such  reasons 
that  keen  students  continually  study  gold  move¬ 
ments,  money  rates,  and  exchange. 

Practically  all  business  is  carried  on  by  a  utiliza¬ 
tion  of  credit  5  borrowing  for  either  a  short  or 
longer  time  is  necessary.  The  rates  for  loans  — 
money  rates  —  vary  according  to  the  demand  and 
supply  of  credit,  and  money  rate  statistics  are  ex¬ 
ceedingly  valuable.  A  period  of  over-expansion  is 
generally  marked  by  high  money  rates  at  home  and 
in  leading  foreign  countries,  and  during  the  progress 
of  great  wars  the  whole  machinery  on  which  these 
subjects  hinge  may  be  thrown  out  of  gear. 

During  the  World  War  extensive  European  pur¬ 
chases  in  the  United  States  produced  a  net  balance 
of  more  than  $1,500,000,000  gold  in  this  country. 
After  the  war  we  had  more  than  a  third  of  all  the 
monetary  gold  in  the  world ;  while  many  other 
countries  had  not  a  sufficient  supply  to  serve  as  a 
basis  for  their  monetary  systems.  Of  course,  such 
countries  must  eventually  return  to  a  gold  basis  or 
completely  change  their  monetary  standards.  To 
get  these  countries  back  to  a  proper  gold  basis  the 


28 


BUSINESS  FUNDAMENTALS 


United  States  would  necessarily  have  to  release  a 
large  amount  of  the  gold  received  during  the  war. 
In  such  a  case,  heavy  exports  of  gold  from  the 
United  States  might  not  be  a  bad  sign,  indicating, 
perhaps,  a  general  world  recovery. 

VIII.  Commodity  Prices: 

There  is  no  more  interesting  and  possibly  no 
more  valuable  subject  than  commodity  prices. 
Everybody  is  interested  in  the  rise  and  fall  of  prices 
of  the  articles  with  which  we  deal  in  everyday  life. 
Merchants  and  manufacturers  turn  immediately  to 
the  daily  papers  to  see  the  live  stock,  grain,  metal 
and  other  commodity  quotations.  Commodity  prices 
are  perhaps  the  most  sensitive  barometer  we  have, 
with  the  exception  of  the  security  markets.  They 
are  really  the  nerve  center  of  business  and  fluctuate 
more  violently  than  most  other  subjects. 

This  was  clearly  illustrated  in  the  precipitate  de¬ 
cline  which  began  in  the  middle  of  1920,  and,  to¬ 
gether  with  other  factors,  resulted  in  the  failure  of 
thousands  of  business  concerns.  The  wholesale  price 
index  of  the  Department  of  Labor  declined  from 
the  high  point  of  247  in  May,  1920,  to  the  low 
point  of  140  in  1921  — a  drop  of  43  per  cent.  The 
Babson  commodity  index  also  declined  with  startling 
rapidity. 

Rising  prices  mean  increasing  profits  and  lead  to 
wer-expansion.  Such  declines  as  the  one  just  men¬ 
tioned  mean  ruin.  As  commodities  go  up,  it  is  an 


FUNDAMENTALS,  WHAT  THEY  FORETELL  29 

easy  matter  for  the  business  man  to  buy  a  stock  of 
goods  and  make  a  profit.  He  cannot  help  making 
money.  Toward  the  peak  of  the  price  advance  and 
on  the  downward  side  he  is  in  exactly  the  reverse 
position,  but  he  may  always  be  prepared  if  he  stud¬ 
ies  fundamental  statistics. 

Not  only  do  business  men  study  the  various  com¬ 
bined  commodity  price  indexes,  which  show  the 
general  trend,  but  they  also  give  close  attention  to 
the  various  groups.  All  groups  do  not  often  move 
in  complete  unison.  There  are  raw  materials,  man¬ 
ufactured  materials,  cotton,  grains  and  other  crop 
commodities,  iron,  copper,  and  similar  groups. 
Each  has  a  definite  relation  to  the  business  trend. 

Very  closely  related  with  this  subject  is  the  matter 
of  world  gold  production.  When  gold  is  mined  at 
the  rate  of  $1,000,000  a  day  it  is  evident  that  these 
figures  must  be  watched  to  see  the  effect  of  this 
supply  on  the  inflation  of  prices.  This  is  because 
gold  is  our  measure  of  value.  Our  whole  business 
system  is  built  around  a  structure  of  values.  That 
is  why  commodity  prices,  which  represent  these 
values,  must  be  watched  with  great  care.  All  busi¬ 
ness  contracts  are  based  on  prices.  The  greatest 
calamities  which  business  men  have  suffered  have 
come  from  misjudgment  of  the  trend  of  this  funda¬ 
mental  barometer. 


30 


BUSINESS  FUNDAMENTALS 


IX.  Investment  Statistics : 

The  investment  markets  portray  the  attempts  of 
millions  of  people  —  foreign  as  well  as  domestic  — 
to  acquire  ,what  seems  to  them  the  best  investments 
and  to  forecast  in  the  most  practical  way  the  business 
tendencies  of  the  country.  In  the  most  practical 
way,  I  say,  because  they  back  their  judgment  with 
their  money!  Thus  the  big  exchanges  of  the  world 
carry  on  dealings  aggregating  billions  of  dollars  a 
day,  not  to  mention  a  very  heavy  volume  of  trading 
in  outside  markets.  Most  buyers  and  sellers  of 
securities  endeavor  to  anticipate  price  changes,  and 
leading  bankers  and  brokers  have  statisticians  con¬ 
tinually  studying  fundamental  statistics  for  that 
very  purpose. 

Some  go  so  far  as  to  say,  “  If  I  know  what  the 
New  York  stock  market  is  doing,  I  need  no  other 
business  indicator.”  Other  merchants  and  manufac¬ 
turers  say  they  desire  to  know  nothing  whatever 
concerning  stock  quotations.  Of  course,  neither 
view  is  correct,  but  my  experience  of  many  years 
proves  conclusively  that  this  subject  must  be  included 
as  a  business  barometer.  The  two  divisions  to  be 
tabulated  are  (i)  price  quotations,  and  (2)  volume 
of  transactions. 

Both  bond  and  stock  prices  are  quoted  on  the  New 
York  Stock  Exchange.  These  classes  are  essentially 
different,  and  statistics  of  both  groups  must  be  care¬ 
fully  kept  separate.  Sometimes  weeks  will  elapse 


FUNDAMENTALS,  WHAT  THEY  FORETELL  3 1 

without  much  change  in  prices.  At  other  times 
there  will  be  violent  movements  up  or  down,  em¬ 
bracing  the  whole  list,  or  only  limited  sections,  as 
the  case  may  be.  Day-to-day  movements  have  prac¬ 
tically  no  value  for  the  student  of  fundamentals, 
but  the  trend  over  the  months  and  years  is  a  very 
good  barometer.  Short  movements  have  little  value 
because  prices  can  to  a  certain  extent  be  manipulated 
by  powerful  “  pools.”  But  no  manipulator  can  in¬ 
definitely  buck  the  longer  trend  of  fundamental 
conditions.  In  fact,  such  interests  keep  this  trend 
carefully  in  mind. 

Price  quotations  and  volume  of  transactions 
should  be  studied  together.  The  volume  is  very 
large  toward  the  culmination  of  bull  movements, 
and  again  on  the  down-side  when  liquidation  is  well 
under  way.  When  the  volume  is  smallest,  prices 
are  low,  and  nobody  is  interested  in  stocks,  the  wise 
ones  are  accumulating  bargains. 

As  in  commodities,  the  various  groups  should  be 
watched.  Railroad  quotations  were  for  more  than 
fifty  years  the  most  important  section  of  the  market, 
both  in  bonds  and  stocks.  Of  late  years  industrials 
have  come  to  the  front,  and  during  the  World  War 
they  were  leaders  in  activity.  Coppers  have  always 
been  a  leading  group  and  public  utilities  often  at¬ 
tract  general  speculative  interest. 

In  connection  with  investment  statistics  we  must 
not  overlook  such  subjects  as  new  securities,  new 
incorporations,  etc.,  but  these  will  be  discussed  later. 


32  BUSINESS  FUNDAMENTALS 

X.  Crop  Conditions >  and  Other  Production  Figures: 

The  United  States  has  always  been  extremely 
rich  in  natural  resources.  Its  minerals,  its  grain, 
and  its  cotton  are  in  demand  all  over  the  world  $ 
and  nearly  one-half  its  population  are  farmers. 
Hence,  the  great  importance  of  this  group  of  ba¬ 
rometers.  Vast  areas  in  the  great  West  are  de¬ 
pendent  for  their  buying  power  on  the  success  or 
failure  of  agricultural  pursuits,  and  our  lives  would 
be  vastly  changed  if  it  were  not  for  the  .wonderful 
productiveness  of  our  rich  country. 

When  we  think  that  grain,  cotton,  iron  and  steel 
to  the  value  of  several  hundred  million  dollars  each 
are  exported  to  foreign  shores  in  a  year,  the  impor¬ 
tance  of  this  subject  is  evident.  Many  industries  are 
absolutely  dependent  on  the  crops,  and  aj  large  group 
of  commodity  prices  are  directly  affected  thereby. 
The  railroads  are  particularly  affected  by  crop  condi¬ 
tions.  The  crop  outlook  through  the  growing  season 
is  followed  with  the  greatest  interest,  and  in  this  the 
whole  country  is  aided  by  the  Government,  which 
collects  the  necessary  data  and  makes  very  depend¬ 
able  forecasts  at  intervals  throughout  the  growing 
season. 

We  produce  40  per  cent,  or  more  of  the  world’s 
iron  ore,  copper,  and  coal.  Hence,  one  should  fol¬ 
low  with  utmost  regularity  blast  furnace  statistics, 
unfilled  tonnage  reports  of  the  United  States  Steel 
Corporation,  copper  and  coal  production. 


FUNDAMENTALS,  WHAT  THEY  FORETELL  33 

XI.  Railroad  and  Industrial  Profits: 

Railroad  earnings  really  serve  as  a  double  barom¬ 
eter  of  business.  The  gross  earnings  act  as  a  good 
indicator  of  the  general  business  activity.  Just  as 
bank  clearings  represent  the  total  volume  of  pur¬ 
chases  made  in  the  United  States,  so  do  railroad 
earnings  indicate  manufacturing  and  agricultural 
activity.  Most  of  the  goods  bought  must  be  trans¬ 
ported  by  the  roads.  In  every  period  of  business 
depression  gross  railroad  earnings  decline,  and  when 
conditions  improve  they  are  among  the  first  barome¬ 
ters  to  advance.  In  1914,  at  the  depth  of  the  de¬ 
pression,  gross  railroad  earnings  were  only  $12,300 
per  mile,  although  some  of  this  was  due  to  increased 
rates.  In  1920,  there  were  $26,600  per  mile,  more 
than  twice  as  large.  Net  railroad  earnings,  while 
very  important,  serve  a  different  purpose  as  a  ba¬ 
rometer;  they  reflect  more  directly  the  financial  con¬ 
dition  of  the  railroads  themselves. 

Prices  of  rail  securities  are  directly  dependent 
upon  railroad  earnings  —  in  fact,  the  markets  dis¬ 
count  to  a  certain  extent  these  reports.  As  most 
investments  are  either  directly  or  indirectly  depend¬ 
ent  on  railroads,  railroad  earnings  are  of  great  im¬ 
portance  to  the  investor.  Moreover,  they  are  one 
group  of  corporations  which  regularly  report  their 
earnings  each  month.  Since  only  a  few  other  cor¬ 
porations  report  so  frequently,  this  is  of  great  ad¬ 
vantage  to  the  statistician. 


34  BUSINESS  FUNDAMENTALS 

Because  of  the  lack  of  frequent  reports,  it  is 
much  harder  for  the  student  to  get  a  line  on  the 
progress  of  industrial  projects.  Yearly  operating 
figures  are  generally  available,  but  as  far  as  monthly 
statistics  are  concerned,  we  are  largely  limited  to  a 
record  of  industrial  dividend  payments.  These  in¬ 
dicate  some  measure  of  the  prosperity  of  the  manu¬ 
facturing  business  of  the  country.  In  connection 
with  the  railroads,  it  may  be  mentioned  that  freight 
car  statistics  have  for  years  been  a  barometer.  Idle 
car  figures  are  obtainable  each  week,  and  freight 
car  loadings  by  the  various  groups  are  often 
utilized. 

XII.  Social  and  Religious  Factors: 

Although  this  subject  comes  last  on  our  list,  it 
might  be  considered,  if  suitable  figures  could  be 
found,  by  far  the  most  valuable  and  important  one  of 
all.  For  true  religion  is  fundamental  to  our  whole 
business  structure ;  business  depressions  are  a  direct 
result  of  extravagance,  recklessness,  waste,  greed, 
and  irreligion,  which  develop  during  the  so-called 
boom  times.  During  periods  of  depression,  we  re¬ 
pent  our  wasteful  methods,  we  seek  to  perform  true 
service  in  order  to  get  the  proper  remuneration, 
and  again  place  reliance  on  the  true  values  in  life. 

The  political  factor  should  perhaps  also  be  in¬ 
cluded  under  this  heading.  Certainly,  there  is  a 
relation  which  holds  between  politics  and  the  busi¬ 
ness  conditions.  I  am  continually  beset  by  people 


FUNDAMENTALS,  WHAT  THEY  FORETELL  35 

who  ask  me  if  the  political  outlook  does  not  sug¬ 
gest  certain  changes  in  business.  At  times  this 
may  be  true,  but  a  study  of  fundamentals  shows 
that  the  trend  of  political  factors  is  more  an  effect 
of  the  other  business  fundamentals  than  a  cause. 
One  thing  is  sure  —  the  rotation  of  business  seasons 
has  often  put  a  political  party  in  power  or  caused 
its  overthrow. 

Under  this  head  should  also  be  tabulated  statistics 
on  general  confidence.  I  have  in  mind  new  securi¬ 
ties  issued,  new  incorporations,  etc.  When  confi¬ 
dence  is  created  and  we  are  working  toward  better 
business  these  figures  show  startling  increases.  Dur¬ 
ing  periods  of  decline  and  depression  the  reverse  is 
true.  Such  figures  as  above  stated,  however,  are 
but  a  meagre  measure  of  this  most  fundamental 
group  of  indicators. 

A  stream  can  rise  no  higher  than  its  source;  and 
the  prosperity  of  a  country  is  absolutely  dependent 
upon  its  moral  and  social  conditions.  Rome  and  the 
other  rich  ancient  nations  fell  when  5  per  cent,  of 
the  people  held  95  per  cent,  of  the  wealth,  lived  in 
extravagance  and  sin,  and  oppressed  the  other  95 
per  cent,  of  the  people.  It  is  an  unanswerable  argu¬ 
ment  that  the  statistics  of  new  members  of  the 
nation’s  leading  churches  show  great  gains  when  the 
country  is  in  a  depression,  and  declines  when  the 
country,  in  the  midst  of  a  boom  period,  is  throwing 
away  money  and  burning  the  candle  at  both  ends! 
Never  forget  that  the  progress  of  the  country  de- 


BUSINESS  FUNDAMENTALS 


36 

pends  upon  the  vision  of  its  people.  u  Where  there 
is  no  vision  the  people  (and  business)  perish.” 

It  has  been  said  that  there  never  has  been  a  panic 
which  was  not  caused  by  disregarding  either  the 
Ten  Commandments  or  the  multiplication  table, 
the  two  great  fundamentals  of  business.  I  dislike 
unduly  to  emphasize  this  fact  for  fear  of  being 
thought  hypocritical.  Nevertheless,  over  twenty 
years  of  study  of  business  conditions  shows  this  to 
be  absolutely  true.  Moreover,  it  is  evident  that  the 
multiplication  table  is  only  a  tool  of  the  Ten  Com¬ 
mandments. 

Hence,  when  studying  fundamental  conditions, 
give  more  thought  to  the  Ten  Commandments  — 
look  first  and  last  at  the  attitude  and  purpose  of 
the  people.  When  a  nation  is  in  a  period  in  which 
the  great  majority  are  seeking  only  pleasure  and 
doing  as  little  work  as  possible,  then  one  may  easily 
foretell  disaster  and  unemployment.  When  a 
change  for  the  better  has  come  over  the  nation  and 
men  are  again  honest  and  industrious,  it  is  safe  to 
foretell  prosperity  and  progress. 


Chapter  III 

MAKING  FIGURES  TALK 
HERE  is  no  sense  in  collecting  and  compiling 


X  statistics  unless  they  are  to  give  some  valu¬ 
able  information  about  one’s  present  relative  loca¬ 
tion  and  the  direction  in  which  one  is  headed.  It 
naturally  follows  that  they  should  be  reduced  to  a 
form  that  will  give  this  information  quickly  and 
truthfully. 

Most  people  are  “  eye-minded;  ”  that  is,  the  eye 
is  quicker  than  the  ear,  if  we  may  paraphrase  the 
old-fashioned  sleight-of-hand  performer.  When 
you  read  a  page,  it  is  the  ear  that  is  really  working. 
Consciously  or  unconsciously,  the  printed  letters, 
seen  by  the  eye,  are  formed  into  a  word  which  is 
spoken  in  the  mind  if  not  spoken  audibly.  Hearing 
the  word,  the  brain  connects  it  with  an  image  and 
the  subject  is  understood.  In  the  case  of  a  picture, 
the  process  is  much  simpler.  The  eye  registers  every 
detail  at  a  glance  and  the  image  is  received  by 
the  brain  without  any  translation  whatever.  That 
is  why  it  is  quite  impossible  for  the  average  person 
to  carry  six  or  seven  figures  in  the  mind  at  the  same 
time  and  perceive  the  relative  value  and  position  of 
each.  If  they  can  be  made  into  a  picture,  however, 

37 


38  BUSINESS  FUNDAMENTALS 

the  same  mind  will  read  the  results  through  the  eye 
immediately.  Incidentally,  the  concept  will  remain 
in  the  memory  much  longer  than  any  explanation 
of  the  same  idea  through  the  printed  word. 

It  is  evident,  therefore,  that  to  be  of  value  and 
to  serve  their  purpose  most  statistics  must  be  re¬ 
duced  to  pictures.  These  charts,  as  we  call  them, 
were  once  the  exclusive  property  of  engineers,  archi¬ 
tects,  and  technically  trained  men  who  learned  to 
use  them  in,  connection  with  plans  and  specifications 
for  the  presentation  of  more  or  less  involved  ideas 
to  non-technical  minds.  Of  late,  how’ever,  they 
have  come  into  their  own  in  the  business  world. 
Hence,  an  understanding  of  charts  is  a  very  neces¬ 
sary  part  of  one’s  business  education.  It  is  impor¬ 
tant  to  be  able  to  understand  a  chart  5  otherwise,  the 
greatest  value  of  all  useful  statistics  is  largely  lost. 
It  is  also  vital  that  one  be  able  to  make  simple  charts 
to  illustrate  one’s  own  ideas  and  to  demonstrate 
them  easily  and  quickly  to  others. 

There  are  only  half  a  dozen  forms  which  can  be 
used  to  illustrate  almost  any  data  or  information. 
Since  each  of  these  has  its  own  particular  use,  the 
results  are  liable  to  be  disastrous  if  they  are  not  kept 
in  their  proper  place. 

To  begin  with  the  simplest  problem,  suppose  we 
want  to  make  a  chart  illustrating  the  relation  be¬ 
tween  the  volume  of  business  done  by  two  compet¬ 
ing  manufacturers.  Let’s  say,  for  instance,  that  A’s 
sales  are  $200,000  and  B’s  sales  are  $400,000. 


Simple  Bar  Chart  —  Single  Comparison 


MAKING  FIGURES  TALK 


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40  BUSINESS  FUNDAMENTALS 

This  comparison  can  best  be  illustrated  by  what 
is  known  as  a  vertical  bar  chart.  Simply  draw  a 
horizontal  line  across  the  paper  as  a  base.  A  ver¬ 
tical  line  near  the  left-hand  edge  of  the  sheet  will 
then  serve  as  a  measure  or  scale.  In  this  case,  you 
might  decide  that  an  inch  represents  $100,000  in 
sales.  Ifl  this  is  the  case,  a  point  on  the  vertical  line, 
one  inch  above  the  base  line,  marks  $1 00,000 j  a 
point  two  inches  above,  $  200,000 ;  and  so  on.  When 
the  scale  is  completed,  we  have  one  point  two  inches 
above  the  base  line  and  another  point  four  inches 
above  the  base  line.  Let  these  points  locate  the 
tops  of  two  vertical  bars,  about  one  quarter  of  an 
inch  wide,  which  run  from  the  base  line  to  these 
levels.  They  may  be  made  as  wide  as  you  like, 
sometimes  taking  the  form  of  a  rectangular  block 
so  that  they  can  be  seen  more  easily  from  a  distance. 
The  point  to  bear  in  mind  is  that  a  barred  chart 
compares  the  length  of  the  two  lines  and  not 
their  width.  By  labeling  these  two  vertical  bars  A 
and  B,  you  have  a  picture  that  will  be  quickly  and 
easily  understood  by  almost  any  one.  It  tells  imme¬ 
diately  that  B’s  business  is  double  that  of  A. 

If  it  is  desired  to  compare  the  volume  of  these 
two  concerns  for  more  than  one  year,  you’ll  simply 
date  your  first  vertical  bars  1921,  for  instance,  and 
by  moving  over  to  the  right  on  the  same  chart,  you 
can  make  another  pair  of  bars  in  exactly  the 
same  manner,  which  will  tell  the  story  for  1922. 
You  now  have  a  picture  which  not  only  compares 


MAKING  FIGURES  TALK 


41 


the  two  concerns  for  a  given  year,  but  each  of  them 
with  its  own  previous  year,  and  also  their  relative 
position  for  both  years.  If  you  are  going  to  chart 
several  years  and  want  to  get  the  picture  into  a  rela¬ 
tively  small  space  for  easy  and  quick  comparison, 
you  may  make  the  bars  for  each  year  very  close 
together  and  distinguish  them  by  filling  one  in  solid 
black  and  leaving  the  other  open,  or  by  shading  it 
with  cross  lines  or  dots  or  some  other  distinguishing 
feature.  Every  chart,  by  the  way,  should  carry  an 
explanation  which  indicates  clearly  what  each  of 
these  bars  represents. 

If  one  wishes  to  go  a  step  further  and  show,  for 
instance,  what  portion  of  these  goods  .were  sold  at 
retail  and  what  portion  at  wholesale,  the  vertical 
bar  representing  A’s  total  business  for  the  given 
year  might  be  divided  into  two  parts  —  a  lower  part 
which  might  be  filled  in  solid  black,  and  an  upper 
part  which  might  be  shaded  or  left  open,  one  part 
representing  retail,  the  other  wholesale  trade.  The 
total  volume  would  still  be  just  the  same  as  com¬ 
pared  with  B’s,  but  the  picture  would  give  one  addi¬ 
tional  fact. 

Wherever  it  is  desirable  to  compare  two  vol¬ 
umes  or  express  a  single  relationship  between  two 
facts,  it  is  best  to  use  either  the  vertical  bar  or  the 
horizontal  bar  chart.  The  latter  is  exactly  the  same 
as  the  former,  excepting  that  the  base  line  is  a  ver¬ 
tical  line  at  the  left-hand  side  of  the  page. 

This  horizontal  chart  is  ordinarily  used  when  de- 


BUSINESS  FUNDAMENTALS 


Simple  Bar  Chart  Divided  to  Show  Proportion 


MAKING  FIGURES  TALK  43 

siring  to  split  the  .whole  into  several  parts.  If  we 
have  analyzed  the  sales,  for  instance,  and  want  to 
picture  the  total  and  show  what  part  of  the  $400,- 
OOO  represents  cost  of  raw  material,  manufacturing 
expense,  sales  expense,  etc.,  we  construct  a  horizontal 
bar  and  divide  it  into  portions  which  represent  the 
various  factors.  For  instance,  if  the  bar  is  four 
inches  long  and  the  cost  of  the  manufactured  goods 
represents  50  per  cent,  of  the  total  selling  price, 
we  divide  the  bar  into  halves  and  the  two  inches  to 
the  left  are  filled  in  black  and  labeled  u  Manu¬ 
facturing  Expense.”  If  the  sales  expense  amounts 
to  30  per  cent,  and  the  profits  20  per  cent.,  we  divide 
the  remaining  portion  of  the  bar  into  fifths. 
Three  fifths  are  shaded  in  one  way  and  are  labeled 
“  Sales  Expense,”  and  the  remaining  two  fifths  rep¬ 
resent  the  profit.  This  method  of  presentation  will 
make  percentages  and  fractions  immediately  intelli¬ 
gible  to  almost  any  one.  No  multiplication,  divi¬ 
sion,  subtraction  or  addition  is  necessary  to  see  just 
what  portion  of  the  total  is  represented  by  each 
factor. 

The  so-called  “  pie  chart,”  or  circle  divided  into 
sectors,  is  very  often  used  to  illustrate  this  division 
or  breaking  up  of  a  whole  into  a  number  of  parts. 
While  more  common  than  the  bar  chart,  it  is  not 
ordinarily  so  good,  because  it  is  much  more  difficult 
to  divide  the  circle  into  segments  that  will  repre¬ 
sent  the  fractions  to  be  pictured.  For  this  same 
reason  it  is  also  subject  to  a  possible  misinterpreta- 


BUSINESS  FUNDAMENTALS 


1 

44 

tion,  because  it  is  rather  difficult  to  compare  various 
areas  and  be  sure  of  judging  them  correctly.  If 
in  a  hurry,  don’t  try  to  make  a  pie  chart.  You  can 
make  a  bar  chart  in  about  one-fifth  the  time.  If 
you  do  want  to  use  the  circle  for  purely  decorative 
purposes,  it  is  best  to  add  the  percentages  or  frac¬ 
tions  to  the  chart.  Write  them  in  on  the  various 


AGE-35 

Age  35,  io  Wealthy,  io  Well  Off,  75  Self  Supporting, 

5  Have  Died 

pieces  of  the  pie,  so  that  the  reader  has  a  check  on 
his  first  impression. 

Another  form  of  charting  that  has  been  used  for 
decorative  effect  more  than  anything  else  consists 
of  various  sized  pictures  of  the  thing  that  the  figures 
represent.  For  instance,  in  comparing  the  sizes 
of  armies,  it  is  often  the  practice  to  draw  pictures  of 
various  sized  soldiers.  A  big  soldier  is  supposed  to 
represent  the  biggest  army  and  a  little  soldier 


MAKING  FIGURES  TALK 


45 

represents  the  smallest  army.  Big  barrels  of  flour 
represent  a  large  crop,  while  smaller  barrels  of 
flour  represent  a  smaller  crop.  This  method,  of 
course,  has  the  distinct  advantage  of  picturing  the 
thing  represented  3  so  that  a  reader  need  hardly 
bother  with  the  explanation.  One  difficulty  is  that 
these  same  pictures  are  liable  to  misrepresent  3  for, 
if  one  army  is  larger  than  the  other  army,  one  sol¬ 
dier  must  be  larger.  If  one  army  is  twice  as  large 
as  the  other3  one  soldier  should  be  twice  as  large 
as  the  other  3  but  when  he  is  twice  as  large,  he  is,  of 
course,  broader  and  he  looks  at  least  four  times  as 
large  as  his  little  brother. 

People  are  liable  to  come  to  conclusions  which 
are  entirely  wrong  from  such  pictures,  because  they 
judge  by  area  rather  than  by  height.  This  difficulty 
in  presenting  picture  charts  can  be  overcome  by 
using  smaller  units  5  instead  of  making  two  soldiers, 
make  two  rows  of  smaller  figures  in  uniform.  The 
first  with  ten  men,  for  instance,  all  the  same  size, 
may  represent  the  larger  army;  the  second,  with 
five  men,  the  same  size  as  the  first,  may  represent 
the  smaller  army.  You  still  have  the  figure  of  the 
soldier,  and  there  is  no  possible  chance  for  making 
a  mistake  in  reading  the  charts,  for  it  is  seen  at  a 
glance  that  the  first  army  is  twice  the  size  of  the 
second. 

These  three  forms  of  charts  will  enable  one  to 
picture  any  given  situation  clearly  and  truthfully3 
so  that  the  facts  will  be  readily  grasped  and  a  clear 


BUSINESS  FUNDAMENTALS 


46 

impression  will  remain.  If,  however,  we  wish  to  go 
beyond  the  present  or  given  situation  and  find  out 
which  way  we  are  headed  and  where  we  are  going, 
it  is  necessary  to  change  our  form  and  employ  the 
line  graph. 

If  we  want  to  compare  the  volume  of  sales  over 
a  period  of  years  with  the  cost  over  the  same  years, 
we  start  by  laying  out  the  base  line  and  the  vertical 
scale  exactly  as  we  would  for  a  bar  chart.  It  is 
customary  to  measure  off  the  years  on  the  base  or 
horizontal  line  and  the  variable  factors  of  volume 
on  the  vertical  line.  We  then  locate  our  points  for 
total  sales  and  cost  for  each  year,  exactly  as  we 
would  if  we  were  making  up  a  bar  chart,  but  instead 
of  drawing  the  bars  from  the  base  line  to  these 
points,  we  simply  connect  all  the  points  representing 
sales  with  a  single  line.  If  the  bars  had  been  drawn 
in,  this  line  would  connect  the  tops  of  them.  The 
line  for  cost  is  determined  in  the  same  way  by  draw¬ 
ing  a  line  from  the  left-hand  side  of  the  sheet  to 
the  first  cost  point,  then  to  the  next  cost  point,  then 
to  the  third,  and  so  on.  When  we  have  finished, 
we  have  two  wiggly  lines  which  show  the  direction 
that  sales  and  cost  took  each  year  and  which  also 
show  whether  cost  and  sales  were  going  up  at  the 
same  time  or  whether  one  was  practically  stationary 
while  the  other  was  increasing  or  decreasing. 

If  the  lines  run  close  together,  or  cross  each  other, 
at  any  point  in  the  chart,  it  is  advisable  to  make  one 
a  solid  line  and  the  other  a  broken  or  dashed  line 


MAKING  FIGURES  TALK 


47 

or  in  some  way  to  distinguish  it.  Colors  are  very 
effective  if  they  can  be  used  without  inconvenience. 
In  this  case,  a  blue  line  might  represent  the  total 
sales  and  a  red  line  costs.  Such  distinguishing 
marks  make  it  much  easier  to  follow  the  lines  on  a 
chart.  Almost  any  number  of  the  latest  factors  can 
be  pictured  on  the  same  chart  if  each  is  distinguished 
clearly  from  the  others. 

It  is  very  important,  however,  that  you  bear 
clearly  in  mind  that  this  form  of  chart  is  a  line 
chart,  that  it  gives  present  location  and  volume.  It 
tells  whether  the  factor  pictured  is  increasing  or 
decreasing,  but  it  does  not  show  the  rate  of  increase 
or  decrease.  This  last  point  will  be  clear  when  you 
see  the  difference  between  the  chart  just  described 
and  what  is  known  as  a  ratio  chart. 

In  the  ratio  or  percentage  chart,  the  horizontal 
scale  —  the  years  —  is  determined  exactly  as  in  the 
bar  chart  and  the  line  chart.  The  vertical  scale, 
however,  is  quite  different.  Instead  of  being  com¬ 
posed  of  equal  units  representing  an  equal  given  in¬ 
crease  in  volume,  it  is  arranged  so  that  equal  units 
represent  equal  increases  in  percentage.  In  the  line 
chart  we  scaled  one  inch  representing  $100,000,  two 
inches  representing  $200,000,  three  inches  repre¬ 
senting  $300,000,  and  four  inches  representing 
$400,000.  A  ratio  chart  is  arranged  so  that  these 
equal  distances  represent  an  increase  of  100  per  cent. 
On  the  ratio  chart,  the  first  point  on  the  vertical 
scale  would  represent  $100,000.  The  inch  from 


BUSINESS  FUNDAMENTALS 


Line  Chart  —  Shows  Location  and  Volume 


MAKING  FIGURES  TALK 


49 

there  to  the  next  point  represents  ioo  per  cent,  in¬ 
crease  $  so  our  second  point  is  $200,000.  The  next 
inch  represents  100  per  cent,  increase  $  so  our  next 
point  is  $400,000,  instead  of  $300,000.  The  fourth 
inch  doubles  it  once  more  and  is  $800,000.  The 
fifth  inch  should  be  labeled  $1,600,000  and  so  on. 
Once  the  scale  is  determined,  the  charting  is  done 
exactly  as  on  the  line  chart.  You  can  get  ratio  or 
logarithmic  charting  paper  which  makes  it  quite  as 
easy  to  chart  this  way  as  the  older  way. 

The  ratio  chart  has  a  further  advantage  in  that 
two  unrelated  factors  about  the  same  business,  or 
about  different  businesses,  for  that  matter,  can  be 
charted  on  the  same  piece  of  paper.  You  can  chart 
the  sales  in  dollars  as  shown  on  the  left-hand  scale 
that  we  just  laid  out.  You  can  also  lay  out  an  en¬ 
tirely  different  scale  of,  let  us  say,  number  of  em¬ 
ployees,  down  the  right-hand  side  of  the  sheet.  You 
can  then  chart  the  sales  and  the  number  of  em¬ 
ployees  on  the  same  piece  of  paper  and  can  compare 
them  directly,  because  both  have  been  reduced  to 
the  common  factor  of  percentage  of  increase  or  de¬ 
crease.  When  the  two  lines  approach  one  another,  it 
means  that  your  sales  per  employee  are  decreasing. 
Whenever  they  get  farther  apart,  it  means  that  sales 
per  employee  are  increasing. 

The  big  thing  to  remember  is  that  if  you  want 
to  show  the  rate  of  growth  or  percentage  of  in¬ 
crease  or  decrease,  you  must  use  the  ratio  chart  in¬ 
stead  of  the  line  chart. 


50 


BUSINESS  FUNDAMENTALS 


The  last  form  of  chart  to  consider  for  ordinary 
commercial  use  is  the  colored  map  in  which  a  given 
territory  is  divided  into  various  sections,  colored  or 


Vonthljr  value  of  Building  remit* 
in 

103  AHQgLBS.OAl. 

1914  1918  1916  191?  1918  1919  1980  1981  "1988  1983 


Ratio  or  Logarithmic  Chart 


MAKING  FIGURES  TALK 


51 

shaded  to  represent  conditions  for  direct  comparison 
with  other  sections  shown  on  the  same  map.  This 
form  is  very  efficient  when  the  problem  involves  a 
given  section  of  the  country,  and  it  can  be  used  with 
great  effect  to  record  conditions  of  the  sales  field. 

You  now  have  a  method  of  charting  for  almost 
any  conceivable  set  of  data.  As  we  continue  our 
study  of  the  fundamentals,  we  will  use  several 
charts  in  order  that  you'  may  become  thoroughly 
familiar  with  them.  You  will  find  that  they  will 
be  of  tremendous  help,  both  in  your  own  study,  and 
in  your  effort  to  communicate  your  ideas  to  others. 
Make  a  picture  wherever  possible;  it  is  interesting 
and  much  more  effective  than  a  lengthy  explanation. 


Chapter  IV 

FORECASTING  BUSINESS  CONDITIONS 

FOR  many  years  men  scouted  the  existence  of 
definite  trends  in  business.  There  were  several 
reasons.  One  was  because  statistical  records  had 
never  been  sufficiently  developed  to  illustrate  accu¬ 
rately  the  movements.  The  chief  difficulty,  how¬ 
ever,  was  that  no  satisfactory  explanation  of  the 
cause  of  business  trends  had  been  found.  Exhaus¬ 
tive  inquiries  were  conducted  into  the  causes  of 
panics  and  depressions  which  created  such  disaster. 

Little  progress  was  made,  however,  until  the 
people  began  to  realize  that  the  seed  of  fames  is 
sown  during  the  periods  of  over-expansion  which 
precede  them . 

Panics  and  depressions  are  merely  the  reaction 
from  over-expansion,  extravagance,  and  other  ex¬ 
cesses  which  develop  during  the  times  of  so-called 
prosperity. 

This  discovery  opened  up  an  entirely  new  line  of 
thought.  It  was  nothing  but  the  application  to 
business  of  Sir  Isaac  Newton’s  law  of  action  and 
reaction.  This  is  one  of  the  most  fundamental 
laws  of  the  universe,  underlying  all  the  sciences, 
from  astronomy  to  chemistry.  It  usually  has  been 
taught  to  young  people  in  connection  with  the  study 

52 


FORECASTING  BUSINESS  CONDITIONS  S3 

of  physics,  under  a  chapter  relating  to  mechanics. 
Almost  every  one  has  endeavored  to  lift  a  rock  by 
the  use  of  a  crowbar.  To  do  this  he  has  placed  one 
end  of  the  crowbar  under  an  edge  of  the  rock  which 
he  is  attempting  to  raise,  and  then,  a  few  inches  from 
that  end  of  the  crowbar  .which  is  underneath  the 
rock,  he  has  put  a  small  stone  which  he  uses  as  a 
fulcrum.  A  person  who  could  not  raise  this  load 
one-thousandth  of  an  inch  by  straight  lifting  is  able 
to  raise  it  several  inches  by  pressing  down  on  the  far 
end  of  the  crowbar.  Of  course,  crowbars  were  used 
to  raise  stones  when  the  pyramids  were  being  built 
in  Egypt,  centuries  before  Sir  Isaac  Newton  was 
bom;  but  Newton  was  the  first  man  to  discover  that 
the  distance  on  the  crowbar  from  the  fulcrum  to  the 
operator’s  hand  multiplied  by  the  force  used  by  the 
operator  equals  the  distance  from  the  fulcrum  to 
the  stone  multiplied  by  the  weight  of  the  stone. 

As  soon  as  Sir  Isaac  Newton  published  these  facts, 
a  scientific  reason  existed  for  the  ordinary  balance 
scales  and  scores  of  other  instruments  which  were 
then  in  use  and  which  have  since  been  developed. 
This  law  is  the  basis  of  the  steam  engine,  the  electric 
dynamo,  water-power  installation,  and  every  other 
power  machine.  All  calculation  of  forces  and  all 
formulas  relating  to  them  derived  tfpir  conception 
from  this  law  of  action  and  reaction,  f 

If  there  is  one  thing  that  science  teaches,  it  is 
that  this  law  of  action  and  reaction  cannot  be  elimi¬ 
nated.  We  may  dread  it  and  attempt  to  ignore  it, 


1 


54  BUSINESS  FUNDAMENTALS 

but  it  is  always  in  operation  in  thousands  of  diversi¬ 
fied  ways.  Whether  making  a  balloon  ascension  or 
raising  our  feet  in  walking,  we  are  working  in  ac¬ 
cordance  with  law  of  action  and  reaction. 

The  study  of  hygiene  is  comparatively  in  the 
same  stage  in  which  that  of  mechanics  was  a  couple 
of  centuries  ago.  As  a  matter  of  history,  only  in 
recent  years  have  fundamental  laws  been  scientifi¬ 
cally  applied  to  the  study  of  the  human  body.  In¬ 
stead  of  grasping  the  fact  that  the  same  laws  apply 
to  men  as  to  commodities,  physicians  used  to  doctor 
with  different  methods  and  various  drugs,  hoping 
to  hit  something  that  would  perform  a  cure.  With 
the  knowledge  that  men  are  simply  machines 
there  has  come  a  great  change,  and  doctors  have 
learned  that  to  do  good  work  they  themselves  must 
be  good  mechanics. 

Physicians  now  recognize  Newton’s  law  of  action 
and  reaction  in  its  relation  to  sleep,  breathing,  eat¬ 
ing,  exercise,  etc.  For  instance,  every  man  has  a 
certain  normal  line  of  sleep;  that  is,  he  requires  a 
certain  amount  of  sleep,  which  varies  with  different 
individuals  at  different  ages,  but  .which  for  a  given 
individual  at  a  given  age,  is  a  constant  factor.  For 
all  a  man  varies  from  this  normal  line  of  required 
sleep  in  one  direction  he  must  compensate  by  varying 
a  corresponding  amount  the  other  side  of  the  line. 
Whenever  a  man  performs  an  abnormal  amount  of 
labor,  causing  him  to  lose  sleep,  it  then  becomes 
necessary  for  him  to  rest  and  make  up  a  corre- 


FORECASTING  BUSINESS  CONDITIONS  $5 

sponding  amount.  If  he  attempts  to  ignore  the  law 
of  action  and  reaction  and  continues  his  excesses, 
he  becomes  ill,  and  is  forced  to  go  to  bed  and  make 
up  his  required  amount  of  rest.  This  law  of  action 
and  reaction  applies  in  the  same  way  to  man’s 
breathing,  eating,  and  exercising. 

Not  only  are  certain  physicians  making  progress 
to-day  through  the  use  of  Newton’s  law,  but  psy¬ 
chologists  as  well  are  employing  it  in  their  experi¬ 
ments.  It  is  a  fact  well  known  to  students  of  New¬ 
ton’s  investigations  that  the  great  scientist  found 
this  law  to  apply,  not  only  to  mechanical  and  astro¬ 
nomical  phenomena,  but  also  to  affairs  more  re¬ 
motely  removed  from  such  sciences.  The  student 
of  McLaurin’s  famous  treatise,  “  Sir  Isaac  New¬ 
ton’s  Philosophical  Discoveries,”  will  find  that 
Newton  believed  that  the  voluntary  actions  of  men 
en  masse  are  subject  to  the  law  of  action  and  re¬ 
action. 

By  applying  Newton’s  law,  the  various  business 
subjects  which  I  have  previously  described  as  funda¬ 
mentals  become  barometers  of  business,  instead  of 
mere  thermometers .  Take,  for  example,  the  subject 
of  business  failures.  When  reports  show  a  small 
number  of  failures,  it  is  said  that  the  credit  situation 
is  very  favorable.  Viewed  in  this  way,  failures 
are  only  a  thermometer  of  business.  Applying  the 
law  of  action  and  reaction,  we  know  that  an  unusu¬ 
ally  small  number  of  failures  means  that  the 
ordinary  process  of  “  weeding  out  the  weaklings  ” 


BUSINESS  FUNDAMENTALS 


56 

is  not  taking  place  and  that  later  the  number  of 
failures  will  run  as  high  above  the  average  line  as 
they  previously  were  below.  Used  in  this  way,  the 
failure  statistics  become  a  barometer  of  business 
and  are  invaluable  to  the  business  executive  in  plan¬ 
ning  his  policy  of  credit  extension,  /j  C 

Likewise,  an  excessively  large  volume  of  bank 
clearings  indicates  exceptional  activity  at  the  time. 
If  one  used  them  as  a  thermometer,  he  would  feel 
justified  in  building  a  new  factory  and  in  laying  in 
heavy  stocks  of  merchandise.  Applying  Newton’s 
law,  the  executive  knows  that  excessive  activ¬ 
ity  indicates  that  business  is  at  the  peak  of  the  cycle. 
Instead  of  extending  his  plant,  he  builds  up  a  good 
balance  of  ready  cash  in  the  bank,  reduces  his  stock 
of  materials,  and  prepares  for  the  break  which  must 
follow. 

In  the  same  way  each  of  these  business  subjects 
has  its  own  significance.  While  no  one  subject  can 
be  relied  upon  at  all  times,  the  majority  are  always 
reliable.  The  best  plan,  therefore,  is  to  combine  a 
representative  number  of  barometric  subjects  into  a 
single  index  the  same)  as  you  would  combine  the 
prices  of  a  group  of  commodities  to  form  a  com¬ 
modity  price  index.  It  is  well  to  correct  the  original 
figures  in  order  to  eliminate  the  effect  of  seasonal 
fluctuations.  Aside  from  allowing  for  usual  seasonal 
movements  in  the  subjects  and  reducing  them  to  a 
common  denominator,  however,  no  other  modifica¬ 
tion  is  necessary  or  desirable. 


ri&J Mi  >  73  '  ' 


(Jf  bo  o  t*.  '• 


.. 

l)fS  r  ;  / 

BRIGHTON  BRANCH 


/ 


BUSINESS  VALUE  INDEX 
This  Week  139  (Preliminary) 

For  the  Month  of  July  135  (Final) 


Commodity 
Price  Scale 


Stock  • 
Scale  * 


Bond  Yield 
Scale  (Inverted! 


Copyrighted.  All  Rights  Strictly  Reserved  and  Protected 


1904 

1905 

1906 

1907 

1908 

1909 

1910 


1911 


1912 


1913 


1914 


1915 


1916 


Babsonchart  of  American  Business  Conditions 

(Showing  Business  in  Terms  of  Dollars) 


EXPLANATION 

—  —  The  solid  red  line  is  a  record  of  important 
rallies  and  declines  of  40  stocks.  The  red  scale 
figures  under  1920  refer  to  this  line. 

-  -  -The  dotted  red  line  is  a  record  of  the  aver¬ 
age  yield  of  twenty  active  bonds.  The  red  figures 
under  1911  (with  scale  inverted)  refer  to  this  line. 

- The  dotted  black  line  Is  a  record  of  the  average 

wholesale  price  of  20  commodities  excluding  food¬ 
stuffs.  The  figures  under  1913  refer  to  this  line. 
★  Stars  mark  last  quotations  before  going  to  press. 


1917 


1918 


November  27,  1923 


1922 


1923 


Com. 

164 


-*70 


Stocks 
84. 


Explanation  of  the  Babsonchart 

The  large  shaded  areas  are  formed  by  com¬ 
bining  and  plotting  the  Statistical  Sheet 
figures.  The  subjects  used  are  New  Building, 
Crops,  Check  Transactions,  Immigration, 
Total  Foreign  Trade,  Money  Rates  (adjusted 
scales),  Failures,  Commodity  Prices,  Railroad 
Earnings,  Stock  Prices.  An  index  of  Canadian 
business  conditions  is  also  included.  These 
subjects  combined  give  a  Babsonchart  of  busi¬ 
ness  in  America.  When  Interstate  Commerce 
reports  for  all  United  States  railroads  became 
available,  January,  1909,  this  record  was  sub¬ 
stituted  in  place  of  the  earnings  of  ten  repre¬ 
sentative  roads  which  had  been  used  previous 
to  that  time.  Revised  scales  were  also  intro¬ 
duced  for  monetary  figures  August,  1912.  Bank 
Clearings  were  used  from  1904  to  1918, inclusive; 
Check  Transactions  for  a  selected  list  of  cities 
then  were  substituted. 

The  line  X- Y  represents  the  country ’snet  gain 
or  growth.  Based  on  the  economic  theory  that 
“action  and  reaction  are  equal”  when  the  two 
factors  of  time  and  intensity  are  multiplied  to 
form  an  area,  the  sums  of  the  areas  above  and 
below  said  line  X-Y  must,  over  sufficiently  long 
periods  of  time,  be  equal,  provided  enough  sub¬ 
jects  are  included,  properly  weighed  and  com¬ 
bined. 

It  will  be  seen  that  each  area  is  divided  into 
halves  by  a  narrow  white  line.  This  is  to  em¬ 
phasize  the  fact  that  the  first  halves  of  Areas  A, 
C  and  E  are  really  reactions  from  the  extrava¬ 
gance,  inefficiency  and  corruption  which 
existed  during  the  latter  half  of  the  preceding 
“over-expansion”  area.  Contrariwise,  the  first 
halves  of  Areas  B,  D  and  F  are  really  based  upon 
the  economy,  industry  and  righteousness 
developed  during  the  hard  times  justpreceding. 

An  area  may  temporarily  be  interrupted 
and  develop  in  two  or  more  parts.  Never¬ 
theless,  the  total  of  an  area  of  depression 
must  finally  be  equal  to  the  total  of  the  pre¬ 
ceding  area  of  over-expansion  before  another 
prolonged  period  of  expansion  can  take  place. 
When  the  area  is  divided  into  two  or  more 
parts  the  stock  market  has  two  or  more  dis¬ 
tinct  movements,  and  clients  may  be  justified 
in  taking  advantage  of  them. 

The  high  points  of  the  stock  market  have 
come  in  the  early  part  of  the  over -expansion 
areas  and  the  low  points  have  come  about  the 
beginning  of  the  depression  areas,  although  in 
1914  the  war  held  prices  of  both  stocks  and 
bonds  down  longer  than  usual.  Low  money 
rates  and  high  bond  prices  have  usually  come 
about  the  end  of  the  depression  areas  and  high 
money  rates  and  low  bond  prices  at  about  the 
end  of  the  over-expansion  areas. 

Further  details  as  to  how  the  Babsonchart  is  com¬ 
piled  and  the  X-Y  Line  located  will  be  sent  to  any  one 
on  application.  Questions  are  always  welcomed. 


•  -»■«*  •*  i- 

* 


. 

■ 


* 


-  -  1 


■ 


* 


.  . 


_ 


FORECASTING  BUSINESS  CONDITIONS  $7 

The  chart  opposite  shows  the  result  of  combining 
and  charting  twelve  barometric  subjects.  The  sub¬ 
jects  used  are  new  buildings,  crops,  check  transac¬ 
tions,  immigration,  total  foreign  trade  and  money 
(adjusted  scales),  failures,  commodity  prices,  rail¬ 
road  earnings,  stock  prices.  An  index  of  Canadian 
business  conditions  is  also  included.  These  subjects 
combined  make  the  Babsonchart  of  Business  for 

i 

America.  When  Interstate  Commerce  Commission 
reports  for  all  United  States  railroads  became  avail¬ 
able,  in  January,  1909,  this  record  was  substituted  in 
place  of  the  earnings  of  ten  representative  roads 
which  had  been  used  previous  to  that  time.  Revised 
scales  were  also  introduced  for  monetary  figures, 
in  August,  1912.  Bank  clearings  were  used  from 
1904  to  1918,  inclusive,  after  which  check  transac¬ 
tions  were  substituted  therefor. 

The  line  X-Y  represents  the  country’s  net  gain 
or  growth.  Based  on  the  economic  theory  that 
action  and  reaction  are  equal  when  the  two  factors 
of  time  and  intensity  are  multiplied  to  form  an 
area,  the  sums  of  the  areas  above  and  below  said 
line  X-Y  must,  over  sufficiently  long  periods  of 
time,  be  equal,  provided  enough  subjects  are  in¬ 
cluded,  properly  weighted  and  combined. 

It  will  be  seen  that  each  area  is  divided  into 
halves  by  a  narrow  white  line.  This  is  to  empha¬ 
size  the  fact  that  the  first  halves  of  areas  A,  C,  and 
E  are  really  reactions  from  the  extravagance,  in¬ 
efficiency  and  corruption  which  existed  during  the 


BUSINESS  FUNDAMENTALS 


58 

latter  half  of  the  preceding  “  over-expansion  *  area. 
Contrariwise,  the  first  halves  of  areas  B,  D,  and  F 
are  really  based  upon  the  economy,  industry  and 
righteousness  developed  during  the  hard  times  just 
preceding. 

The  high  points  of  the  stock  market  have  come 
in  the  early  part  of  the  over-expansion  areas,  and 
the  low  points  have  come  about  the  beginning  of 
the  depression  areas ;  although  in  1914  the  war  held 
prices  of  both  stocks  and  bonds  down  longer  than 
usual.  Low  money  rates  and  high  bond  prices  have 
usually  come  about  the  end  of  the  depression  areas, 
and  high  money  rates  and  low  bond  prices  at  about 
the  end  of  the  over-expansion  areas. 

The  slope  of  the  line  X-Y,  the  country’s  check 
transactions,  must  always  be  estimated  for  the  cur¬ 
rent  year  and  is  thus  shown  as  a  horizontal  line, 
dotted  and  undetermined.  After  the  close  of  any 
year,  however,  we  know  better  what  its  slope  should 
be  and  then  indicate  it  by  a  solid  black  line. 

Here  we  have  a  picture  of  American  business 
from  1 904  until  the  present  time.  It  shows  exactly 
where  we  are  and  where  we  are  going.  It  tells 
when  to  buy  and  when  to  sell. 

The  succeeding  periods  of  the  business  phase 
and  the  succeeding  developments  are  evident.  And, 
since  each  of  these  consists  of  2,  regular  succession 
of  steps,  one  can,  by  following  this  chart,  forecast 
coming  conditions  in  almost  every  field  of  business 
activity  with  remarkable  accuracy. 


FORECASTING  BUSINESS  CONDITIONS  59 

The  accompanying  business  dial  pictures  the 
twelve  steps  of  the  typical  phase.  Beginning  at  the 
top  we  have  a  period  of  prosperity,  with  high  money 
rates  and  increasing  real  estate  prices.  As  prosper¬ 
ity  increases  wages  mount  and  producing  costs  rise. 
Too  much  money  leads  to  dissipation  and  ineffici¬ 
ency,  which  are  reflected  in  every  one  from  the 
president  of  the  business  to  the  chap  who  sweeps 
out  the  shops  at  night.  Inefficiency  and  increase  in 
costs  naturally  force  prices  up,  and  when  commod¬ 
ity  prices  rise  interest  rates  go  with  them  and  bond 
prices  go  down. 

Inefficiency  then  develops  into  downright  dis¬ 
honesty.  Business  becomes  demoralized.  The  de¬ 
cline  is  under  way,  public  confidence  disappears, 
pessimism  is  the  vogue,  and  stock  prices  tumble.  As 
dishonesty  becomes  more  general  there  follow  the 
cancellation  of  contracts,  petty  thefts  and  sabotage. 
Increased  unemployment  naturally  aggravates  this, 
and  the  crime  wave  follows. 

When  public  confidence  is  shaken  the  purse  strings 
tighten,  business  falls  off,  and  forced  sales  break 
prices.  Once  they  are  on  the  toboggan,  commodi¬ 
ties  drop  almost  overnight. 

By  this  time  business  is  thoroughly  disorganized 
and  hard  times  are  upon  us  in  earnest.  Ambition 
and  initiative  have  been  discouraged  by  a  series  of 
reverses;  many  business  men  are  flat  on  their  backs, 
figuratively  speaking,  and  are  making  no  effort  to 
get  up.  Shops  and  factories  are  closed.  Bread 


6o 


BUSINESS  FUNDAMENTALS 


lines  are  in  evidence.  The  political  party  in  power 
is  doomed  for  defeat  at  the  next  election. 

As  unemployment  continues  we  experience  a  phe¬ 
nomenon  best  described  as  the  consolidation  of 
homes.  The  young  folks  who  branched  out  for 

Babson  Business  Dial 


PROSPERITY 
MICH  MONEY  RATES 
INFLATED  REAL  ESTATE  PRICES 


ACTIVITY  IN  ALL  LINES 
GENERAL  EMPLOYMENT 


HIGH  WAGES 

PRODUCING  COSTS 


GENERAL  BUYING  RESUMED 
INCREASING  COMMODITY 
PRICES 


INEFFICIENCY 
LOW  BOND  PRICES 


RELIGIOUS  INTEREST 
.RICH  STOCK  PRICES 


DISHONESTY 
LOW  STOCK  PRICES 


CRSATFR 
MICH  BOND  PRICES 


CRIME  WAVE 

LOW  COMMODITY  PRICES 


INCREASING 
LOW  LABOR  COSTS 


COT&OLIDATtON  OF  ROMES 
LOW  REAL  ESTATE  PRICES 


themselves  and  set  up  their  own  establishments  dur¬ 
ing  the  period  of  over-expansion  now  move  back 
and  t€  double-up  ”  with  their  parents  to  save  rent. 
This  naturally  reduces  the  number  of  dwellings 
occupied  and  cuts  down  tremendously  the  demand 


FORECASTING  business  CONDITIONS  6 1 

for  improved  real  estate,  and  declining  real  estate 
prices  follow. 

About  this  time  those  who  are  lucky  enough  to 
have  jobs  appreciate  them  and  go  to  work  with  a 
vengeance.  Recent  reverses  have  taught  a  lesson, 
and  thrift  takes  the  place  of  extravagance.  Now, 
just  as  soon  as  51  per  cent,  of  the  people  begin  to 
produce  more  than  they  consume,  we  build  up  a 
reserve  power  and  fundamental  conditions  begin  to 
reflect  improvement.  Increased  activity  means  that 
a  man  does  more  work  for  a  day’s  pay  than  he  did 
during  the  rush  times.  Wages  in  many  cases  have 
been  reduced.  The  two  combine  for  a  lower  labor 
cost.  The  manufacturer  is  then  able  to  reduce  his 
prices  to  the  legitimate  consumer  and  on  the  new 
basis  can  get  a  certain  amount  of  business.  Because 
consumption  of  goods  has  been  cut  down  and  money 
is  being  saved  we  rapidly  build  up  a  surplus  which 
forms  the  basis  for  a  period  of  improvement. 

We  here  begin  to  see  a  justification  for  the  old 
adage,  “We  take  our  troubles  to  the  Lord,  but  run 
to  the  Devil  with  our  happiness.”  The  dishonesty 
of  the  period  of  decline  has  given  way  to  a  quick¬ 
ened  religious  interest.  Hard  work  is  good  for 
every  one’s  soul,  and  most  persons  are  too  busy 
holding  their  jobs  to  get  into  much  trouble. 

As  stocks  go  down,  we  find  that  the  dollar  will 
buy  more.  Lack  of  activity  lessens  the  demand  for 
money  and  interest  rates  decline  automatically. 
Bond  prices  rise.  The  student  of  fundamentals 


6  2 


BUSINESS  FUNDAMENTALS 


who  bought  bonds  during  the  period  of  decline  is 
rewarded  for  his  foresight  and  courage. 

As  industry  and  thrift  continue,  the  signs  of  im¬ 
provement  become  more  evident.  Stock  prices 
strengthen  materially  in  anticipation  of  the  resump¬ 
tion  of  industrial  profits.  Again  the  student  of 
fundamental  conditions  who  bought  his  list  of  stocks 
when  those  who  knew  no  better  were  pessimistic 
and  afraid  to  buy  is  rewarded  for  his  foresight.  -  - 

As  improvement  progresses,  prices  become  stabil¬ 
ized  at  their  new  level,  and  the  general  public  be¬ 
gins  to  buy  again.  Business  activity  returns  to  a 
satisfactory  basis,  almost  every  one  is  employed, 
and  prices  gradually  strengthen  under  increased 
demand. 

During  the  period  of  prosperity,  rabid  speculation 
sets  in  in  earnest.  Profits  are  large,  and  every  one 
is  expanding.  There  is  a  great  demand  for  money. 
High  interest  rates  result  and  general  expansion  de¬ 
mands  more  room.  Real  estate  prices,  for  resi¬ 
dential  property  as  well  as  for  business  sites,  ad¬ 
vance.  The  stock  market  goes  on  a  spree  of  spec¬ 
ulation.  Wage  workers  wear  silk  shirts.  Every 
one  seems  to  forget  the  lessons  learned  during  the 
last  period  of  depression.  To  get  something  for 
nothing  seems  to  be  the  fashion.  We  begin  to  spend 
more  and  produce  less.  Right  here  we  prick  the 
bubble  and  go  down  on  the  toboggan  into  another 
period  of  decline. 

The  possibilities  for  profit  for  the  average  busi- 


FORECASTING  BUSINESS  CONDITIONS  63 

ness  man  and  investor  are  evident.  He  not  only 
has  an  opportunity  to  protect  himself  against  the 
changes  .which  ordinarily  wipe  out  over  half  one’s 
profit,  but  by  knowing  coming  conditions,  he  can 
lay  his  plans  so  as  to  profit  to  an  amazing  degree. 
This  will  be  described  in  detail  in  succeeding 
chapters. 

I  have  said  at  the  beginning  of  this  chapter  that 
some  students  have  always  doubted  the  u  cycle ” 
theory  of  business.  If  they  mean  by  “  cycle  ”  that 
four  years  of  wild  boom  must  be  followed  by  four 
years  of  depression,  three  years  of  depression  must 
be  followed  by  three  years  of  over-expansion,  etc., 
etc.,  I  agree  with  them.  I  will  go  even  further.  I  do 
not  believe  that  we  need  to  have  these  tremendous 
fluctuations  at  all.  We  could  have  continuous  well¬ 
being  and  real  prosperity  along  the  X-Y  Line  of  the 
country’s  growth  if  we  would  but  be  temperate 
and  sane. 

The  law  of  Action-Reaction,  however,  is  absolute, 
and  as  long  as  we  insist  on  over-doing  and  over- 
expanding  we  must  expect  an  equivalent  area  of  re¬ 
action  below  the  X-Y  Line.  So  long  as  business 
continues  in  its  present  habits  we  shall  have  these 
wave  movements,  and  so  long  as  we  do  have  them 
it  is  fatal  to  ignore  them.  Moreover,  every  one  who 
studies  these  changes  and  looks  ahead,  does  just  that 
much  toward  eliminating  such  disastrous  fluctuations. 


Chapter  V 


THE  SEESAW  OF  SUPPLY  AND 

DEMAND 

\\  7*E  are  now  ready  to  apply  fundamental  prin- 
V  V  ciples  to  the  operation  of  the  various  depart¬ 
ments  of  a  business,  that  efficiency  and  profit  may 
be  increased.  Moreover,  the  successful  business  ex¬ 
ecutive  must  apply  such  principles  if  he  is  to  succeed. 
Competition  will  be  extremely  keen  during  the  next 
few  years  and  the  advantage  will  be  with  the  man 
who  can  produce  quality  goods  at  a  relatively  low 
price. 

Since  it  will  be  fatal  to  pay  too  much  for  raw 
material,  we  may  as  well  start  with  a  discussion  of 
scientific  purchasing.  The  law  of  supply  and  de¬ 
mand  will  put  thousands  of  men  out  of  business 
before  igqo.  It  will  also  make  sizable  fortunes  for 
thousands  of  others  who  thoroughly  understand  its 
operation  and  take  advantage  of  the  perfectly  legit¬ 
imate  opportunity  that  it  affords. 

In  the  early  ages,  before  trading  was  ever  prac¬ 
ticed,  families  were  practically  self-sustaining.  They 
built  their  own  homes,  made  their  own  clothing, 
and  produced  their  own  food.  As  civilization  pro¬ 
gressed,  the  separation  of  interests  and  production 

64 


THE  SEESAW  OF  SUPPLY  AND  DEMAND  65 

of  food,  clothing,  and  materials  caused  specializa¬ 
tion,  which  in  turn  necessitated  the  exchange  of 
goods.  At  first  no  medium  of  exchange  existed. 
For  example,  wheat  was  exchanged  for  cotton  5 
lumber  was  exchanged  for  iron.  This  was  known  as 
barter  and  was  practised  until  more  convenient 
forms  were  introduced  as  mediums  of  exchange. 

All  sorts  of  products  have  been  used  as  mediums 
of  exchange.  In  the  early  days  of  this  country, 
tobacco,  the  leading  product,  was  used  in  business 
transactions.  Wampum,  a  shell  found  on  the  At¬ 
lantic  Coast,  once  served  as  a  medium.  The  white 
shell  designated  a  certain  value,  while  the  black 
shell,  being  more  scarce,  held  a  higher  value.  Later, 
gold  and  silver,  due  to  their  scarcity  and  natural 
adaptability,  were  gradually  adopted  by  the  leading 
countries  of  the  world. 

The  exchange  of  commodities  involves  three  im¬ 
portant  phases:  (1)  value 5  (2)  price j  and  (3) 
money.  It  is  not  necessary  to  discuss  here  these 
subjects  in  measure,  yet  the  correct  meaning  of 
value  and  price  is  imperative  for  understanding  the 
characteristics  of  commodity  prices.  The  value  of  a 
commodity  is  determined  by  its  ability  to  exchange 
for  others.  That  is,  if  one  ton  of  coal  exchanges 
for  several  tons  of  iron,  its  value  is  relatively  high. 
On  the  other  hand,  if  several  bushels  of  corn  are 
required  in  exchange  for  one  bushel  of  wheat,  the 
value  of  the  corn  is  low.  There  cannot  be  a  general 
rise  in  the  value  of  commodities,  for  advances  in 


66 


BUSINESS  FUNDAMENTALS 


some  are  counteracted  by  declines  in  the  value  of 
others. 

The  price  of  a  commodity  is  determined  by  the 
amount  of  money  it  will  command  in  any  given 
period.  In  an  era  of  prosperity,  prices  tend  to  rise 
and  naturally  more  money  is  required  to  complete 
a  purchase.  The  Babson  Commodity  Index  in  the 
over-expansion  period  of  early  1920  reached  a  peak 
of  298.  In  a  period  of  decline  and  depression  the 
trend  of  prices  is  inevitably  downward  and  less 
money  is  involved  in  the  buying  and  selling  of 
commodities.  The  commodity  index  figure  in  the 
depression  of  1921  reached  the  low  ebb  of  139. 
Under  these  conditions  it  is  obvious  that  when  prices 
are  high  the  value  of  money  is  low  —  it  takes  more 
money  to  purchase  goods.  When  prices  are  low  the 
value  of  money  is  high,  as  it  takes  smaller  amounts 
to  purchase  more  commodities. 

It  is  generally  understood  that  the  price  of  a 
commodity  depends  primarily  upon  supply  and  de¬ 
mand.  This  fundamental  law  expressed  simply  is: 
first,  that  an  increase  in  supply  in  excess  of  the 
amount  being  consumed  is  bound  sooner  or  later  to 
cause  a  decreasing  price;  second,  a  reduction  in  sup¬ 
ply  greater  than  the  rate  of  consumption  lays  the 
foundation  for  an  upward  tendency  in  price.  On 
this  basis  it  is  entirely  possible  theoretically  to  as¬ 
certain  the  equilibrium  price  level.  That  is,  the 
medial  line  that  would  exist  when  the  amopnt  of 
goods  offered  in  the  market  equals  the  amount  be- 


THE  SEESAW  OF  SUPPLY  AND  DEMAND  67 

ing  consumed.  Practically,  however,  in  modern 
business  an  equilibrium  price  level  cannot  be  main¬ 
tained.  Prices  are  constantly  above  or  below  a  theo¬ 
retical  equilibrium  price  line,  acting  in  sympathy 
with  the  increasing  or  diminishing  rate  of  production 
and  consumption. 

If  the  price  trend  is  downward,  each  successive 
decline  brings  more  buyers  into  the  market,  result¬ 
ing  in  a  gradually  increasing  rate  of  consumption. 
Ultimately  the  point  is  reached  where  consumption 
has  expanded  to  a  level  that  exceeds  the  amount 
being  produced.  Ordinarily,  prices  then  turn  up¬ 
ward,  and  during  the  climb,  consumption,  little  by 
little,  tends  to  diminish.  Thus,  the  equation  of  sup¬ 
ply  and  demand  fluctuates  back  and  forth. 

The  price  of  a  commodity  should  be  based  upon 
the  cost  of  production,  but  it  does  not  necessarily 
follow  that  the  cost  of  production  always  deter¬ 
mines  the  selling  price.  The  price  equals  either  the 
cost  plus  profit,  or  cost  minus  loss.  In  early  1920, 
wool,  silk,  and  cotton  showed  a  marked  profit,  based 
on  producing  costs.  Yet,  by  the  fall  of  1920,  these 
commodities  were  radically  under  the  level  that 
represented  the  cost  of  production. 

The  price  of  a  commodity  is  governed  chiefly  by 
the  equation  of  supply  and  demand.  Demand  in¬ 
volves,  first,  the  utility  of  a  commodity,  which  when 
measured  is  the  amount  of  money  a  person  is  will¬ 
ing  to  give  for  it;  second,  the  possibility  of  sub¬ 
stitution  or  the  consumption  of  another  commodity. 


68 


BUSINESS  FUNDAMENTALS 


i 


cheaper  and  equally  satisfactory ;  and,  third,  ability 
and  willingness  to  buy  commodities.  Supply  con¬ 
sists  of  the  volume  of  output  of  commodities  to 
cope  with  the  factors  involved  in  demand. 

The  great  problem  in  business  is  to  regulate  sup¬ 
ply  to  the  probable  demand.  It  is  by  a  successful 
anticipation  of  future  demand  that  the  individual  is 
permitted  to  build  a  permanently  safe  industrial  or 
commercial  structure.  In  the  normal  course  of 
events,  there  are  three  problems  that  must  be  solved, 
at  least  with  moderate  accuracy,  to  insure  a  fair 
profit.  First,  the  prospective  demand  six  months, 
a  year,  or  two  years  hence  5  second,  the  probable 
supply  during  the  same  period  5  and,  third,  the 
logical  cost  of  production  and  selling  price  justified 
by  the  changes  in  supply  and  demand.  Demand, 
like  the  flow  of  a  river,  is  not  standardized.  Some¬ 
times  it  is  highj  again,  it  is  low.  It  varies  according 
to  fundamental  conditions  and  fluctuations  in  prices. 
High  prices  encourage  curtailed  demand  5  low 
prices  stimulate  increased  demand.  For  example, 
during  the  war  period,  1914-1918,  consumption 
was  maintained  at  a  greater  pace  than  production. 
Consequently,  prices  were  constantly  rising ;  but  by 
early  1920  the  rate  of  commodity  production  ex¬ 
ceeded  the  rate  of  absorption,  and  prices  could  then 
turn  only  one  way  —  downward. 

Human  nature  also  enters  into  the  question  of 
demand.  When  prices  rise  people  often  rush  to 
market  to  protect  future  needs  before  a  further 


BUSINESS  FUNDAMENTALS 


70 

price  advance  occurs.  A  hysterical  buying  move¬ 
ment  is  brought  about  in  this  manner  —  it  becomes 
a  sellers’  market.  When  the  tendency  is  downward 
buyers  assume  an  indifferent  attitude,  negotiating 
only  as  stock  is  needed  —  it’s  a  buyers’  market. 

Supply,  like  demand,  is  an  unknown  factor.  If 
prices  rise,  certain  buying  policies  immediately  be¬ 
come  effective.  Some  build  up  heavy  inventories 
with  the  idea  of  liquidating  at  a  higher  price  level  j 
others  buy  sparingly  in  anticipation  of  a  decline.  It 
is  such  factors  as  these  that  increase  the  uncertainty 
of  the  supply  and  demand  volume.  In  addition, 
elements  such  as  producing  capacity,  transportation, 
labor,  strikes,  and  floods,  are  factors  that  directly 
affect  supply  and  demand.  All  of  the  uncertainty 
in  buying  and  selling  cannot  be  overcome,  yet  there 
is  a  definite  procedure  that  every  merchant  and 
manufacturer  can  follow  which  in  the  long  run  will 
net  the  highest  average  profit  possible. 

It  has  been  already  pointed  out  that  business  does 
not  run  a  smooth  course.  The  volume  and  value 
of  business  inevitably  move  in  phases.  As  far  back 
as  the  records  of  Babson’s  Statistical  Organization 
are  available  —  even  before  the  Civil  War  —  we 
note  the  four  periods  in  business  phase:  (1) 
over-expansion,  (2)  decline,  (3)  depression,  and 
(4)  improvement.  These  movements  have  con¬ 
stantly  materialized  since  the  advent  of  trading. 
We  are  to-day  in  one  of  these  stages.  As  time  goes 
on  we  shall  step  to  a  new  era,  but  that  period  and 


THE  SEESAW  OF  SUPPLY  AND  DEMAND  7 1 

time  will  be  followed  by  another  fundamental 
change. 

The  same  fundamental  principle  5  namely,  that 
underlying  conditions  govern  the  trend  of  business, 
is  also  true  of  commodity  prices.  One  business 
barometer,  such  as  crops,  bank  clearings,  or  inter¬ 
national  trade,  cannot  be  taken  as  a  criterion  for  the- 
commodity  market  as  a  whole.  Commodities  must 
be  directly  associated  with  the  composite  trend  of 
business  as  represented  by  the  Babsonchart  or 
grouped  barometers. 

The  first  step  in  a  scientific  analysis  of  a  com¬ 
modity  is  to  determine  , where  we  are  in  the  economic 
trend  of  business.  Our  position  must  be  either  in 
the  beginning,  the  middle,  or  at  the  end  of  a  period 
of  prosperity,  decline,  depression,  or  improvement. 
This  being  found,  an  adequate  foundation  exists  on 
which  succeeding  forms  of  analysis  can  be  con¬ 
structed.  This  is  the  one  fundamental  feature  that 
the  business  man  has  long  overlooked. 

While  individual  barometers  cannot  be  taken  as  a 
criterion,  all  are  important  as  they  directly  or  in¬ 
directly  affect  the  commodity  market.  In  a  later 
chapter  the  relationship  of  individual  barometers  to 
business  conditions  is  outlined  in  detail.  A  reac¬ 
tion  in  the  trend  of  an  individual  barometer  is  a 
warning  that  definite  changes  are  not  far  distant . 

In  the  main,  all  barometers  are  important.  Yet, 
the  principal  individual  barometers  which  should  be 
watched  with  constant  care  in  connection  with  com- 


BUSINESS  FUNDAMENTALS 


72 

modities,  are  failures,  labor,  foreign  trade,  trans¬ 
portation  conditions,  crops,  and  the  money  market. 
In  relation  to  commodities,  barometers  must  be  con¬ 
sidered  individually  as  well  as  collectively. 

Commodities  are  divided  into  two  definite  groups: 
one,  agricultural;  the  other,  industrial.  The  price 
of  agricultural  commodities  under  normal  conditions 
responds  to  two  elements,  seasonal  and  fundamental. 
This  group  is  dependent  chiefly  upon  fluctuations 
in  supply,  primarily  because  the  output  of  agricul¬ 
tural  products  after  a  certain  stage  is  not  governed 
by  human  efforts.  A  certain  acreage  is  planted,  so 
much  is  abandoned,  and  the  yield  per  acre  and  the 
final  output  depend  almost  entirely  upon  seasonal 
developments.  At  the  end  of  the  season  a  certain 
amount  has  been  produced.  This  may  be  large  or 
small,  but  one  point  is  certain;  namely,  the  volume 
cannot  be  increased  or  decreased  until  another  sea¬ 
son.  Therefore,  the  average  price  trend  for  the 
season  depends  largely  upon  fluctuations  in  supply. 
Agricultural  products  also  adhere  to  seasonal  tend¬ 
encies,  usually  reaching  the  low  point  during  the 
early  part  of  the  crop  season  when  market  receipts 
are  heaviest.  While  these  characteristics  prevail, 
fundamental  conditions  are  really  the  governing 
factor,  for  crop  prices  in  addition  inevitably  follow 
the  long  swings  of  business. 

The  price  of  industrial  commodities  depends 
largely  upon  fluctuations  in  demand.  Production, 
unlike  agricultural  products,  can  be  increased  or  de- 


THE  SEESAW  OF  SUPPLY  AND  DEMAND  73 

creased  at  will.  If  the  price  of  lumber,  steel,  or 
copper  advances  to  a  profitable  level,  production  is 
usually  stimulated,  particularly  by  higher  cost  pro¬ 
ducers.  Industrial  commodities  as  a  whole  do  not 
respond  to  seasonal  tendencies  but  follow  in  close 
relationship  to  the  trend  of  business  over  a  period 
of  years.  Commodity  prices  are  seldom  stabilized 
unless  by  Government  intervention.  Prices  are  con¬ 
stantly  responding  to  seasonal  tendencies,  war  con¬ 
ditions,  panics,  and  major  fundamental  changes  in 
conjunction  with  business. 

A  survey  of  commodity  prices  over  an  extensive 
period  indicates  two  important  characteristics.  From 
1900  to  1922  this  country  has  experienced  four  pe¬ 
riods  of  over-expansion  and  four  periods  of  depres¬ 
sion.  The  periods  of  prosperous  times  materialized 
in  1901,  1906,  1910,  and  1916  to  early  1920.  The 
periods  of  depression  covered  1904,  1908,  1914, 
and  1920  and  succeeding  years.  It  is  interesting 
to  compare  the  trend  of  prices  with  the  trend  of  busi¬ 
ness  during  the  four  periods  completed  since  the  first 
of  this  century.  Four  complete  commodity  price 
phases  stand  out  prominently  in  sympathy  with  the 
business  trend.  The  economic  price  pendulum  is  con¬ 
stantly  swinging  and  will  ever  accompany  the  trend 
of  business  upward  and  downward.  These  major 
price  trends  cover  a  period  as  limited  as  three  years, 
while  during  an  era  of  artificial  conditions  such  as 
materialized  from  1915  to  1920,  the  time  limit  ex¬ 
tended  to  seven  years.  It  should  be  borne  in  mind 


« 


74  BUSINESS  FUNDAMENTALS 

that  during  the  upward  and  downward  movements, 
commodity  prices  do  not  run  a  smooth  course.  Ir¬ 
regularity  and  substantial  reactions  are  constantly 
developing,  reflecting  current  conditions. 

The  movements  of  three  to  seven  years  supple¬ 
ment  a  longer  phase  which  covers  a  period  of 
twenty-five  to  thirty  years.  Since  the  American 
Revolution  three  of  these  phases  have  materialized. 
The  low  points  were  reached  in  1783,  1848,  1898, 
and  the  peaks  in  1809,  1865,  1920.  The  accom¬ 
panying  chart  illustrates  this  tendency.  It  is  inter¬ 
esting  to  note  that  the  Napoleonic,  Civil,  and  World 
Wars  mark  the  high  points  in  the  longer  phases, 
and  that  the  lows,  in  the  first  two  cases,  were  not 
reached  until  twenty  to  thirty  years  later. 

From  the  foregoing  it  is  evident  that  commodity 
prices  have  characteristic  trends.  Prices  have  been 
considered  in  composite  form  as  represented  by  the 
leading  indexes,  but  this  does  not  mean  that  commod¬ 
ity  prices  constantly  bear  the  same  price  relationship 
to  each  other  5  all  commodities  do  not  turn  upward 
or  downward  in  price  simultaneously.  Each  com¬ 
modity,  whether  it  is  iron,  steel,  butter,  or  wheat, 
covers  its  own  individual  price  trend.  It  is  practic¬ 
ally  impossible  to  find  in  any  stage  of  business  a  per¬ 
fect  alignment  of  prices.  Some  are  high  and  others 
low.  The  individual  commodity  trend  moves  ahead 
of  business,  in  harmony  with  business,  or  follows  a 
retarded  tendency.  Moreover,  these  trends  are 
constantly  changing.  In  one  period  a  certain  group 


Long  Swing  of  Commodity  Prices — 1782-1921 


BUSINESS  FUNDAMENTALS 


76 

may  precipitate  the  price  movement,  while  again  it 
may  assume  an  inactive  attitude. 

Briefly,  we  have  found  (1)  that  agricultural 
products  are  dependent  on  output,  following  dis¬ 
tinct  seasonal  tendencies,  also  adhering  to  the  under¬ 
lying  long-swing  trend  of  business;  (2)  that  • 
industrial  prices  tend  to  ignore  seasonal  tendencies, 
reacting  in  sympathy  with  the  volume  of  business; 
(3)  that  commodity  prices  follow  developments  of 
three  to  seven  years’  duration;  (4)  that  there  are 
longer  phases  covering  a  period  of  twenty-five  to 
thirty-five  years;  and  (5)  that  each  commodity  has 
an  individual  trend. 

Thus  far  the  first  three  steps  of  commodity  anal¬ 
ysis  have  been  mentioned.  First,  the  location  of 
business  by  a  composite  of  business  barometers;  sec¬ 
ond,  an  analysis  of  individual  barometers ;  and.  third, 
an  analysis  of  price.  Now  the  statistical  position 
must  be  considered.  The  statistical  field  that  fol¬ 
lows  a  commodity  step  by  step  from  the  mine,  forest, 
or  field,  to  the  finished  product  is  tremendous, 
sometimes  involving  as  many  as  thirty  to  forty  sep¬ 
arate  phases.  This  compiling  appears  to  be  an 
enormous  task,  yet  it  is  entirely  possible  in  this  busi¬ 
ness  era  to  obtain  authentic  statistical  facts  on  the 
important  commodities  in  the  world. 

As  an  illustration,  take  the  agricultural  product, 
wheat.  First,  we  must  know  the  United  States 
acreage  year  after  year,  the  yield  per  acre  and  the 
production  derived.  Next  we  consider  the  average 


Commodity  Indices — 1909-1922 


THE  SEESAW  OF  SUPPLY  AND  DEMAND  JJ 


I 


78  BUSINESS  FUNDAMENTALS 

price  to  the  producer,  the  total  farm  value,  and  the 
average  price  at  the  primary  markets  of  distribution. 
Then  there  is  the  question  of  stocks,  it  being  possible 
to  follow  the  increasing  or  diminishing  tendency 
monthly,  in  conjunction  with  the  rate  of  consumption. 
It  is  then  necessary  to  cover  the  volume  of  imports 
and  exports  and  the  carryover  at  the  end  of  the  crop 
year.  Following  this  the  addition  of  world  condi¬ 
tions,  covering  production,  consumption,  and  stocks, 
provides  a  complete  statistical  arrangement  for  any 
one  interested  in  those  factors  that  directly  or  in¬ 
directly  affect  the  price. 

The  eleven  principal  features  that  make  up  an  in¬ 
dustrial  analysis  are  as  follows: 

( 1 )  Production  —  domestic 

(2)  Production  —  foreign 

(a)  monthly 

(b)  yearly 

(3)  Consumption,  domestic 

(4)  Consumption,  foreign 

(5)  Stocks  on  hand  domestic 

(a)  warehouses 

(b)  mills 

( c )  storage 

(6)  Stocks  on,  hand,  foreign 

(7)  Market  movements 

(a)  shipments 

(b)  deliveries 

(8)  Visible  supply 

(9)  Imports 

(10)  Exports 

(11)  Price 


THE  SEESAW  OF  SUPPLY  AND  DEMAND  79 

The  four  principal  factors  in  industrial  commod¬ 
ity  statistics  are  (i)  production,  (2)  domestic  out¬ 
put,  (3)  volume  of  foreign  trade,  and  (4)  relative 
position  of  the  consuming  outlets.  These  must  al¬ 
ways  be  considered,  but  the  safest  policy  and  the 
policy  that  will  produce  maximum  results  is  an  ex¬ 
tensive  analysis  of  each  detailed  phase. 

The  final  point  in  the  study  of  commodity  prices 
is  individual  comparative  statistics.  A  word  regard¬ 
ing  its  application.  In  April,  1920,  this  statement 
appeared  in  Babson’s  Reports: 

Steel  is  not  so  strong  as  certain  conditions  seem  to  indi¬ 
cate.  Premiums  are  gradually  being  reduced.  For  several 
months,  as  clients  know,  excessive  premiums)  have  been 
demanded.  This  materialized  despite  the  fact  that  pro¬ 
duction  during  the  winter  months  increased.  Moreover, 
the  output  during  the  first  quarter  of  this  year  has  not 
only  exceeded  last  year’s  volume  but  it  is  the  largest  since 
1916  when  record  levels  were  reached.  True,  the  United 
States  Steel  Corporation’s  statement  of  unfilled  tonnage 
still  indicates  a  shortage.  Practically,  however,  there  has 
not  been  such  a  great  shortage  at  the  primary  producing 
centers.  Unfavorable  transportation  conditions  have  made 
deliveries  retarded  and  in  many  cases  almost  impossible. 
The  price  advance  in  steel  is  hardly  due  entirely  to  the 
increased  cost  of  production.  The  keynote  to  the  ab¬ 
normal  situation  is  unquestionably  curtailed  deliveries. 
The  outlook,  however,  is  much  more  favorable.  Also,  the 
rate  of  production,  despite  increased  capacity,  is  close  to 
maximum  with  good  prospects  of  being  maintained.  Trans¬ 
portation  is  gradually,  improving.  In  a  word,  we  feel  that 
premiums  will  disappear  more  rapidly  from  now  on. 


8o 


BUSINESS  FUNDAMENTALS 


The  outstanding  question  naturally  is,  what  was 
the  scientific  method  of  analysis  covering  funda¬ 
mental  commodity  statistics  that  justified  this  con¬ 
clusion?  Note  the  application  of  the  previously 
discussed  method: 

(1)  Babsonchart  or  grouped  fundamentals.  The 
Babsonchart  in  early  1920  showed  conclusively  that 
the  period  of  post-war  inflation  had  entirely  spent 
itself.  The  financial,  commercial,  and  industrial 
field  had  expanded  to  a  stage  where  the  foundation 
could  not  uphold  the  artificial  structure.  A  read¬ 
justment  was  inevitable.  Such  a  procedure  was  en¬ 
tirely  substantiated  by  prevailing  conditions,  but  was 
entirely  in  conjunction  with  the  infallible  law  of 
action  and  reaction. 

(2)  A  study  of  Individual  barometers  that  di¬ 
rectly  and  indirectly  affect  commodities.  These 
showed  us  that  not  only  was  the  trend  of  business 
about  to  turn  downward,  but  that  individual  barom¬ 
eters  were  not  favorable  to  a  steel  situation  pegged 
at  the  early  1920  level.  Labor  was  adequate;  the 
money  market  was  tending  downward;  failures 
were  increasing;  transportation  conditions  were  on 
the  mend;  foreign  trade  was  diminishing.  In  fact, 
individual  barometers  favored  the  bear  side  of  the 
question  by  a  marked  margin. 

(3)  A  study  of  price  relationship.  Steel  prices 
in  early  1920  were  ranging  over  100  per  cent,  of 
pre-war,  a  plane  that  could  not  exist  under  the  pro¬ 
spective  contraction  of  economic  conditions  and  the 


THE  SEESAW  OF  SUPPLY  AND  DEMAND  8 1 

prospective  readjustment  in  labor,  fuel,  raw  ma¬ 
terials,  overhead,  and  transportation.  Moreover, 
competition  due  to  the  artificial  expansion  during  the 
war  period  was  beginning. 

(4)  A  study  of  the  statistical  'position  from  initial 
production  to  ultimate  consumption .  A  resume  in¬ 
dicates  that  production  was  being  maintained  in 
excess  of  the  war  level;  that  stocks  in  many  sections 
were  accumulating  despite  the  fact  that  unfilled 
tonnage  showed  an  increase.  Our  exports  were  di¬ 
minishing  and  imports  increasing,  reflecting  the 
status  of  steel  in  the  other  world  markets.  Our 
producing  capacity  was  much  greater  than  our  abil¬ 
ity  to  consume  and  export. 

Four  months  later  steel  had  declined  35  per  cent. 


Chapter  VI 

SCIENTIFIC  PURCHASING 


HAVING  the  fundamental  principles  which 
govern  price  thoroughly  in  mind,  we  will  now 
go  about  forecasting  price  trend  which  will  enable 
us  to  buy  our  supply  of  material  at  or  near  the 
bottom  of  the  market,  and  to  avoid  being  caught 
with  a  heavy  inventory  when  fundamental  condi¬ 
tions  indicate  a  market  decline. 

First,  it  is  necessary  to  collect  proper  information 
and  have  it  in  form  for  convenient  analysis.  Hence, 
the  use  of  tables  of  figures  is  very  satisfactory.  For 
example,  in  the  case  of  cotton,  annual  figures  can 
be  taken  for  several  decades  back,  covering  yearly 
acreage,  production  per  acre,  total  production,  aver¬ 
age  farm  price  per  pound,  farm  value,  average  price 
at  primary  markets,  both  from  the  standpoint  of  the 
calendar  and  crop  years,  imports  and  exports,  world 
production,  stocks  on  hand,  carry-over,  and  con¬ 
sumption.  Such  a  schedule  computed  on  a  yearly 
basis  lays  a  sound  foundation  to  determine  in  what 
direction  the  future  price  is  going. 

The  yearly  form  of  tabulation,  however,  is  really 
the  smallest  part  of  the  statistical  comparison  of 
commodities.  Monthly  figures  are  very  necessary. 

82 


SCIENTIFIC  PURCHASING  83 

In  this  modern  period  of  statistical  information  on 
commodities  it  is  known  at  the  end  of  each  month 
what  the  volume  of  production,  imports,  or  exports 
has  been.  Therefore,  the  entire  statistical  situation 
is  revised  to  note  the  potential  effect  of  these  de¬ 
velopments.  It  is  possible  to  determine  whether 
there  is  a  decreasing  scarcity,  or  a  burdensome  sup¬ 
ply  j  whether  the  statistical  position  justifies  an  up¬ 
ward  price  level,  or  a  revision  to  a  lower  plane. 
Price  records  are  particularly  important.  It  is  of 
little  value  to  know  that  the  price  of  steel  is  $40  a 
ton,  if  it  cannot  be  compared  with  a  price  in  a  period 
of  prosperity  or  a  period  of  depression,  or  even  a 
price  trend  ten,  twenty,  or  thirty  years  previous. 
A  careful  record  of  commodity  prices  daily, 
monthly,  and  yearly,  should  adequately  cover  the 
question  of  price. 

It  is  difficult  for  the  average  business  man  to  pic¬ 
ture  a  true  story  from  a  mass  of  figures.  Hence, 
the  importance  of  graphic  presentation  of  commod¬ 
ity  prices  cannot  be  too  strongly  emphasized.  At  a 
glance  it  can  be  readily  ascertained  whether  a  com¬ 
modity  is  high  or  low,  compared  with  a  former  pe¬ 
riod  and  also  with  a  normal  average.  We  have  also 
found  that  the  study  of  commodity  prices  in  log¬ 
arithmic  chart  form  is  helpful  in  the  study  of  group 
commodities.  Group  commodities  are  those  espec¬ 
ially  related  to  each  other  such  as  brick,  cement,  and 
glass,  when  considering  building  materials,  or  cotton, 
wool,  and  silk,  when  studying  textiles.  Under  nor- 


BUSINESS  FUNDAMENTALS 


84 

mal  conditions  a  definite  ratio  exists.  In  a  period 
of  rapidly  changing  conditions  the  differential  is 
usually  strained.  This  is  a  warning  that  either  one 
commodity  has  gone  up  too  rapidly  or  it  has  not 
gone  up  in  proportion  with  existing  conditions.  A 
growing  discrepancy  is  a  warning  that  a  more  com¬ 
prehensive  and  careful  study  of  the  commodities 
involved  is  necessary. 

It  is  simple  enough  to  mention  what  factors  and 
forms  should  be  taken  into  consideration  in  com¬ 
modity  analysis.  The  chief  difficulty  confronting 
business  men  is  to  distinguish  authentic  sources  and 
figures.  Statistical  data  now  form  an  important  spoke 
in  the  wheel  of  business.  Consequently,  from  all 
sections  of  the  globe,  statistical  reports  and  opinions 
are  being  received.  All  are  important,  for  they 
enable  the  business  man  to  feel  the  pulse  of  every 
market.  Yet,  in  the  final  analysis,  only  the  true, 
unbiased  facts  must  be  considered.  Therefore, 
authentic  sources  alone  should  be  considered.  In 
the  case  of  agricultural  products,  farm  papers  and 
periodicals,  private  sources,  grain  and  agricultural 
associations,  and  Government  reports  from  the  Cen¬ 
sus  Bureau,  the  Department  of  Commerce  and  Agri¬ 
culture  are  at  the  disposal  of  any  one  interested. 
The  facts  and  figures  vary  violently.  None  of  the 
reports  are  100  per  cent,  accurate,  but  it  is  generally 
recognized  by  the  student  of  agricultural  conditions 
that  the  most  reliable  and  authentic  statistics  are 
received  from  the  Government  bureaus.  The  Bu- 


SCIENTIFIC  PURCHASING  8 5 

reau  of  Agriculture  maintains  records  on  the  pro¬ 
duction  and  distribution  of  foodstuffs  which  run 
back  to  the  development  of  the  West.  Each  month 
this  bureau  issues  “  Weather,  Crops,  and  Markets,” 
which  contains  a  wealth  of  information  concerning 
production,  both  estimated  and  actual,  yield  per  acre, 
weather  conditions,  market  developments,  and  a  di¬ 
agnosis  of  certain  commodities.  During  each  sea¬ 
son  of  the  year  the  farmer  and*  consumer  of  agri¬ 
cultural  products  are  in  a  position  to  look  into  the 
future  as  regards  the  crop  situation.  By  December 
harvesting  returns  are  complete  and  the  final  figures 
for  the  year  are  issued. 

In  assimilating  the  industrial  commodity  statis¬ 
tics,  we  again  have  trade  papers  and  periodicals,  pri¬ 
vate  sources,  business  associations,  and  the  various 
Government  bureaus.  All  have  their  place  in  the 
business  field.  But  the  most  authentic  information 
is  received  direct  from  Government  bureaus  and  the 
growing  industrial  associations.  The  Government 
bureaus  to-day  have  adopted  the  policy  long  prac¬ 
tised  in  agricultural  products.  A  few  years  ago  it 
was  difficult  to  determine  the  current  rate  of  output 
of  such  commodities  as  petroleum,  lumber,  or  ce¬ 
ment.  Now  almost  at  the  end  of  each  month  the 
volume  of  production,  consumption,  stocks,  imports, 
and  exports,  prices,  and  other  factors  are  known. 
The  bureaus  of  labor,  commerce,  agriculture,  cen¬ 
sus,  interior,  and  the  Federal  Reserve  Bank,  offer 
a  complete  source  for  practically  all  information 


PRICES  OF  TEN  STAPLE  COMMODITIES 

Average  Wholesale  Price  from  1860-1921 


BUSINESS  FUNDAMENTALS 


8  6 


Coffee 

lb. 

N.  Y. 

O  lO  U)U1  t^OO  M  W)H  N  VOt©  fO  VI  N  CN  lO  M  CN  1+  M  »/> 

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Pork 

bbl. 

N.  Y. 

Hfcl 

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OOfOioOOOvoOO  voOOO+ivoti.O'cot-  OO+iMiotNWOOco 

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Rubber 

lb. 

N.  Y. 

H|t1  •-**  H+1  rtfr* 

VO  loco  O  O  O  >0  N  ft  O  O  N  +  VOOO  1+00  O'  H  HO  N  t^O  «  HOO  + 

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MM  H  H  M 

Copper 

lb. 

N.  Y. 

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OO  PI  OO  OO  CN  tN  CO  tN  M  M  VO  V©  VOO  1+MHVO  OO  O  CO  N  T+ 

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«> 

Iron 

ton 

Birm. 

o  O  C*  Tt*  0*  CO  tJ-00  10  M  CO  00  rfO'O'fOO'W  NM  CO  M  w  O  w  CO00 

w  OOO  o  wo  CS  o  6  N  H  V)  H  OO  ^  H  N  Tt-00  O'  O' 00 

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Wool 

lb 

Boston 

VOOO  00  VO  o  VO  O  vovO  00  'ON«OtO«COO'ON'0«NOiW>Nt*5'+0>tO 
>0  to  V+  tl  O  N  C*  to  +  +  1+tO  NVOlOtOtOtOtOtO  ■+'t'ttOtOtOCOtO«  to 

W 

49 

Sugar 

lb. 

N.  Y. 

22  VO  1*  _|®  M  CN  t^vo  OMMCOt^M  o  O  to  to  to  to  CO  N  00  O' 

CO  l^n|0OH|00®H  ■<*oH«H«h*i*5h  VO  M  CO  CO  to  t©  VON  OOO  00  N  COO  SION  O  M  00 
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OOmmcncnmmmm  hmmmmmmmOO  OOOOOOOOOO 

Cotton 

lb. 

N.  Y. 

MOM  CO  O  VO  M  00  lo  O  1+  vovO  00  tN  tN  1+  M  cOvO  00  00  VOOO  M  CO  VO 

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H 

49 

Corn 

bu. 

Chic. 

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M  H  H  W  H  M 

49 

Wheat 

bu. 

Chic. 

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MMMMMMMMMM  MMMMMMMMMM  MMMMMMMMMM 

SCIENTIFIC  PURCHASING 


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I 


88  BUSINESS  FUNDAMENTALS 

from  the  first  stages  of  industrial  commodity  pro¬ 
duction  to  consumption. 

We  have  found  in  our  studies  that  each  commod¬ 
ity  follows  a  leading  distributing  center.  For  ex¬ 
ample,  the  leading  hide  and  leather  as  well  as  wool 
market  is  Boston ;  sugar  and  coffee,  New  York  5 
grain  and  live  stock,  Chicago.  Therefore,  it  is  the 
best  policy  in  compiling  commodity  prices  to  cover 
quotations  in  the  leading  markets.  There  are  hun¬ 
dreds  of  periodicals,  each  specializing  in  one  or  a 
group  of  commodities.  These  adequately  cover  the 
question  of  price  and  current  market  conditions. 

The  table  on  pages  86  and  87  shows  the  range 
of  ten  staple  commodities,  with  market  and  average 
monthly  price,  i860  to  1921: 

As  an  illustration  of  the  possible  profit  that  can 
be  made  simply  by  the  purchase  and  sale  of  com¬ 
modities  in  connection  with  the  study  of  funda¬ 
mental  and  comparative  statistics  and  price,  the 
following  example  is  submitted:  Starting  with  a 
capital  of  little  over  $50,000,  ten  industrial  com¬ 
modities  were  selected  for  purchase,  first  in  i860. 
They  were  bought  and  sold  again  at  intervals  of 
from  three  to  seven  years,  according  to  indications 
given  by  statistics.  The  original  proportion  of  the 
different  articles  was  kept  the  same  and  the  interest 
added  to  the  principal  on  deposit  in  the  interval  be¬ 
tween  selling  and  buying  was  reckoned  at  4  per  cent. 
Since  all  commodities  are  not  affected  alike  by  the 
same  conditions,  slight  losses  in  certain  cases  were 


SCIENTIFIC  PURCHASING  89 

allowed  to  occur.  The  resulting  accumulation  of 
profit  showed  that  in  about  sixty  years  $54,000  be¬ 
comes  about  $2,000,000.  By  working  a  similar 
problem  with  a  single  commodity  the  maximum 
profit  of  buying  at  the  lo,w  point  and  selling  at  the 
high  point  would  show  the  same  tendency  of  profit. 
Thus,  if  $50,000  were  invested  in  iron  in  i860,  it 
would  have  equalled  to-day  nearly  $3,000,000. 
This  clearly  demonstrates  that  even  the  great  mer¬ 
cantile  fortunes  have  been  acquired  by  the  same 
laws  and  acts  that  give  opportunity  of  profit  to  the 
stock  buyer  and  investor. 

To  secure  such  a  profit,  however,  one  must  not 
make  profit  his  great  object  in  life.  Profits,  like 
happiness,  must  come  through  rendering  service. 
The  man  who  starts  out  deliberately  to  get  happi¬ 
ness  rarely  finds  it.  Happiness  is  the  reaction  which 
comes  from  doing  things  for  others ;  profits  come  in 
the  same  way.  Very  seldom  does  a  man  make 
even  a  financial  success  when  he  deliberately  starts 
out  to  get  rich.  The  great  captains  of  industry  are 
men  who  have  never  tried  to  get  rich.  They  are 
men  who  were  tremendously  interested  in  their 
work,  who  went  to  it  as  to  a  game,  who  tried  to  pro¬ 
duce  or  sell  a  better  product  than  any  one  else  or 
make  the  same  product  cheaper,  and  then  automati¬ 
cally  become  millionaires.  I  am  not  now  preaching 
or  speaking  by  hearsay.  Most  of  America’s  great 
industrial  leaders,  manufacturers,  and  merchants 
are  known  to  me  personally.  Many  of  them  are 


BUSINESS  FUNDAMENTALS 


i 


90 

personal  friends.  I  know  their  aims  and  ambitions 
as  well  as  their  struggles  and  disappointments. 
They  have  become  rich  by  making  their  aim,  not 
profits  but  service . 

This  fact  is  of  great  importance  to  the  young 
man  in  business.  We  hear  too  much  about  profits, 
price,  and  pleasures  j  too  little  about  service,  sound¬ 
ness,  and  sacrifices.  Yet,  these  are  the  things  which 
have  made  America  build  cities,  stretch  the  railroads 
across  the  prairies,  fell  the  forests,  bridge  the  rivers, 
and  develop  the  mines.  Some  of  these  things  were 
done  simply  for  profits,  but  the  great  work  was 
done  by  men  and  women  who  cared  not  especially 
for  the  profit  but  for  the  love  of  doing  things.  I 
am  writing  this  at  the  Tavern,  an  attractive  hotel 
at  the  entrance  of  Gloucester.  As  I  look  from  my 
window  I  see  boys  building  sand  houses  upon  the 
beach.  Other  boys  are  rolling  on  the  sand  or  splash¬ 
ing  in  the,  water.  Is  there  any  doubt  as  to  which  of 
the  boys  will  grow  up  to  be  successful  men?  Yet, 
these  boys  are  not  making  these  sand  houses  for 
profit.  They  simply  love  to  construct  and  develop. 
It  is  the  same  instinct  in  grown-ups  that  makes  great 
captains  of  industry.  Profits,  large  salaries,  and 
riches  come,  not  by  seeking,  but  by  doing.  Men  and 
women  who  supply  efficiently  and  cheaply  the  things 
which  the  world  needs  and  when  the  world  needs 
them,  cannot  help  but  prosper.  But,  of  course,  to 
know  what  the  world  needs  and  when  it  needs  it, 
you  must  study  fundamentals. 


Chapter  VII 

MANAGING  MEN  AND  ECONOMIC 

LAW 

HERE  are  very  few  one-man  businesses.  In 


1  this  day  of  specialization  men  find  that  they 
do  one  thing  or  one  group  of  things  better  than 
another  thing  or  group.  The  logical  outcome  is  to 
hire  some  one  who  is  especially  adapted  or  who  can 
be  trained  to  help  out  in  these  other  activities.  If 
your  business  is  successful  it  becomes  necessary  to 
hire  more  and  more  people  to  help  carry  on  its  vari¬ 
ous  activities.  Very  soon  you  are  facing  some  very 
human  problems  in  getting  along  with  these  people 
and  in  helping  them  to  get  along  with  one  another. 

This  matter  of  managing  men  is  one  of  the  most 
important  in  all  business.  Fundamentally,  it  di¬ 
vides  itself  into  two  distinct  problems.  First,  the 
management  of  the  men  with  whom  we  have  per¬ 
sonal  contact  j  second,  the  management  of  workers 
and  groups  with  whom  we  have  no  personal  ac¬ 
quaintance,  but  who  are  represented  by  a  committee 
or  union  representative.  The  answer  is  the  same  in 
both  cases.  There  is  no  other  place  in  the  entire 
fabric  of  the  commercial  world  where  the  law  of 
action  and  reaction  works  out  any  more  surely  than 


92  BUSINESS  FUNDAMENTALS 

in  the  more  or  less  indefinite  field  of  human  relation. 

“  As  in  mechanics  and  economics ,  so  in  human  re- 
lationsy  every  action  is  followed  by  an  equal  re¬ 
action ”  1 

In  the  first  field  where  the  executive  has  personal 
contact  the  law  is  generally  recognized.  A  man 
may  not  be  conscious  that  he  is  employing  it,  but  his 
very  personal  contact  and  experience  in  working 
with  a  man  will  lead  him  to  apply  it  unconsciously. 
Very  few  initial  rules  are  necessary  in,  this  particular 
field.  Give  a  man  a  chance  to  work,  give  him  all 
the  responsibility  that  he  can  carry,  and  then  let  him 
work  alone  to  sink  or  swim  on  his  own  resources. 
If  he  has  the  right  stuff  in  him  he  will  go  to  work 
with  a  vengeance  and  will  develop  very  rapidly  into 
an  exceptionally  able  man.  If  he  hasn’t  the  right 
sort  of  material  in  him  he  never  will  make  an  ex¬ 
ecutive  anyway,  and  the  sooner  it  is  found  out  the 
better. 

In  the  matter  of  compensation  I  have  always 
found  that  it  pays  to  give  men  a  financial  interest 
in  their  job.  Wherever  it  is  possible  put  a  man  on 
a  basis  such  that  he  shares  a  part  of  the  result  of 
his  particular  work.  He  will  work  harder  than  it 
is  possible  for  him  to  work  on  a  fixed  basis,  and 
both  employee  and  executive  will  make  more  money 
than  they  would  on  any  other  plan. 

The  problem  of  dealing  with  men  with  whom 
you*  do  not  come  in  direct  contact  is  a  much  more 
difficult  one  because  of  the  misunderstandings  that 


MANAGING  MEN  AND  ECONOMIC  LAW  93 

are  bound  to  arise  through  dealing  in  a  roundabout 
way.  Before  I  undertake  the  task  of  outlining  a 
solution  I  am  going  to  trace  briefly  the  path  of  the 
capital-labor  puzzle  through  a  typical  movement. 

The  attitude  of  labor  all  over  the  United  States 
changes  radically  as  we  go  from  prosperity  to  de¬ 
pression,  or  vice  versa.  When  jobs  are  many  and 
men  are  scarce,  labor  assumes  a  more  or  less  arro¬ 
gant  air.  When  we  say  “  more  or  less,”  we  mean 
that  the  greater  the  urgency  of  the  labor  market, 
the  more  powerful  labor  becomes.  During  the  phe¬ 
nomenal  period  of  the  World  War  we  saw  this  fact 
illustrated  to  the  extreme.  Never  before  in  the 
history  of  the  United  States  has  labor  had  such  an 
advantage  in  the  market  as  it  had  during  those  years. 
Four  million  men  were  withdrawn  from  the  pro¬ 
ductive  forces  of  the  country  and  put  into  our  army 
and  navy.  Other  millions  were  engaged  in  supply¬ 
ing  these  forces  .with  sustenance  and  war  material. 
The  balance  were  left  with  the  ordinary  production 
work  of  the  country  on  their  hands.  Furthermore, 
immigration  was  suspended  and  the  ever-fresh  sup¬ 
ply  of  cheap  labor  was  thus  cut  off.  / 

In  consequence  the  workers  had  the  advantage  all 
on  their  side.  They  were  for  the  most  part  loyal 
and  intent  on  serving  their  country.  But  the  ur¬ 
gency  created  by  mounting  living  costs,  coupled  with 
the  power  that  conditions  gave  them,  resulted  in  a 
nation-wide  move  on  the  part  of  labor  to  better  its 
conditions. 


94  BUSINESS  FUNDAMENTALS 

The  outstanding  symptom  of  this  development  is 
the  frequency  of  strikes.  I  give  here  a  chart  of 
strikes  in  the  United  States  from  1915  down  to 
nearly  the  present  time.  All  through  the  war  and 
during  the  period  of  post-war  prosperity,  as  you  see, 
the  strike  curve  was  far  out  of  normal.  Labor  was 
using  its  economic  power  and  employers  were  gen¬ 
erally  unable  successfully  to  cope  with  this  power. 
The  majority  of  the  strikes  were  successful. 

The  period  beginning  in  1921  shows  the  slow 
penetration  of  Labor’s  mind  with  the  fact  that  con¬ 
ditions  had  changed  and  that  the  tactics  of  the  war 
years  could  no  longer  be  followed.  Labor  lost  its 
tendency  to  strike  at  the  slightest  provocation.  J 

During  the  war  period,  wages  on  the  average 
were  doubled.  In  some  cases,  as  for  example  in 
cotton  textiles,  they  were  nearly  trebled.  On  the 
whole,  however,  they  ran  along  about  equal  to  the 
increases  in  the  cost  of  living.  Some  of  the  workers 
did  not  receive  increases  anything  like  the  increases 
in  the  cost  of  living.  Others  made  gains  in 
excess  of  such  increases.  During  this  period  the 
attitude  of  the  employer  was  generally  that  of  prac¬ 
tical  acquiescence.  True,  many  employers  fought 
the  increases  asked  for;  but  in  the  main  employers 
realized  that  the  advantage  was  on  the  side  of  labor 
and  that  all  the  employer  could  do  was  to  limit  and 
not  block  the  evident  tendency. 

With  the  beginning  of  the  depression  a  change 
came.  The  employers  realized  it  first.  Stung  by 


BUSINESS  FUNDAMENTALS 


96 

the  straits  through  which  they  had  gone  during  the 
preceding  four  years,  they  organized  to  get  even 
for  what  they  had  all  suffered.  It  is  fair  to  say 
that  the  attitude  of  labor  during  the  war  is  balanced, 
if  not  over-balanced,  by  the  attitude  of  the  em¬ 
ployer  in  the  years  of  depression.  This  is  an  exact 
illustration  of  the  law  of  action  and  reaction.  Labor, 
by  its  arrogance  during  the  war,  piled  up  for  itself 
this  reaction  on  the  part  of  the  employer.  Or,  if 
you  wish  to  put  it  the  other  way,  the  employer,  be¬ 
cause  of  what  he  had  suffered  during  the  war,  came 
to  the  front  with  a  determination  born  of  his  ex¬ 
periences  when  labor  was  on  top.  I 

Labor  has  been  very  slow  to  realize  this.  When 
the  crash  began  to  spread  over  business  and  when 
men  were  laid  off  and  wages  began  to  drop,  labor 
leaders  like  Mr.  Gompers  raised  a  cry  that  all  of 
this  was  a  deliberate  attempt  on  the  part  of  em-  \ 
ployers  to  punish  and  deflate  labor.  An  examina¬ 
tion  of  the  Babsonchart  and  a  scrutiny  of  the  list  of 
business  failures  during  the  past  two  years  is  suffi¬ 
cient  refutation  of  this  charge.  No  one  has  suffered 
more  than  employers  have  during  this  depression. 

Both  workers  and  employers  were  caught  in  the 
swing  of  forces  bigger  than  themselves.  Neither 
was  to  blame;  each  had  to  suffer,  j  (j  { 

At  last,  however,  labor  has  in  most  cases  realized 
the  truth.  Strikes  have  subsided  and  efficiency  has 
mounted.  The  entire  attitude  of  labpr  has  changed, 
and  the  employer  is  the  master  of  the  situation.  In 


MANAGING  MEN  AND  ECONOMIC  LAW  97 

this  position  he  is  taking,  very  generally,  an  atti¬ 
tude  comparable  to  that  which  labor  assumed  during 
the  war.  Now  this  is  nothing  out  of  the  ordinary. 
It  is  bigger  than  anything  we  have  ever  had  before, 
because  of  the  artificial  stimulation  of  the  war.  The 
swing  back  and  forth  between  labor  and  employer 
is,  however,  what  always  happens  as  we  go  from 
over-expansion  to  depression,  or  from  depression 
to  over-expansion.  ;  < 

One  can  see  this  in  another  ,way  by  examining 
the  history  of  the  unions  and  the  growth  of  union¬ 
ization.  This  is  brought  out  by  the  Babsonchart 
with  the  membership  of  the  American  Federation 
of  Labor  plotted  against  it. 

Now,  we  undoubtedly  have  a  set  disposition  on 
the  part  of  labor  to  get  together  in  unions  of  one 
sort  and  another.  This  tendency  is  on  the  increase 
and  we  shall,  therefore,  expect  to  see  a  steady 
growth  in  unionization,  comparable  to  the  growth 
of  the  country  and  to  the  increase  in  business  activ¬ 
ity.  Indeed,  we  should  expect  this  tendency  some¬ 
what  to  exceed  these  two  items. 

This  chart  also  shows  that,  aside  from  the  ten¬ 
dency  to  unionization,  which  runs  through  the 
period,  there  is  a  very  close  following  of  the 
X-Y  line  throughout  the  entire  period  in  the 
membership  list  of  the  Federation.  There  have 
been  times  when  the  membership  has  mounted 
even  in  times  of  depression.  Its  latest  position 
on  the  chart,  however,  compares  very  closely  with 


BUSINESS  FUNDAMENTALS 


98 

that  of  the  X-Y  line,  if  we  compare  each  with  its 
position  at  the  beginning  of  the  cycle. 


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These  two  illustrations  are  sufficient  to  show  that, 
when  we  come  to  the  relations  of  capital  and  labor, 
or  of  employers  and  employees,  we  find  ourselves 
dealing  with  a  vibratory  movement.  Back  and  forth 


MANAGING  MEN  AND  ECONOMIC  LAW  99 

the  pendulum  swings;  from  one  side  to  the  other 
the  tide  of  battle  ebbs  and  flows.  It  is  not  that 
either  labor  or  capital  wish  it  to  be  so.  This  great 
movement  is  no  deliberate  frame-up  on  either  side. 
In  fact,  each  side,  if  it  could  have  its  way,  would 
wish  to  be  delivered  from  these  relentless  forces 
which  alternately  deflate  and  inflate  one  another. 

The  real  fact  is  that  each  side  is  caught  in  the 
meshes  of  this  great  economic  law.  If  they  could 
but  remember  it  at  the  right  time,  they  might  save 
themselves  a  lot  of  trouble.  But  when  either  side 
happens  to  find  itself  in  possession  of  the  ball, 
it  plays  the  game  as  if  there  was  nothing  different 
coming.  The  great  problem  before  each  side  is  to 
learn  the  law,  to  believe  in  it,  and  to  act  with  refer¬ 
ence  to  it;  so  that  the  grind  of  the  law  may  no 
longer  bring  wretchedness  and  suffering. 

Let  there  be  no  mistake  here.  Employer  and 
employee  have  some  diverse  interests.  They  are 
each  buyers  and  sellers  in  a  competitive  market. 
One  wants  a  high  price;  the  other  a  cheap  com¬ 
modity.  This  separateness  in  interests  will  always 
exist,  so  long  as  the  present  social  order  stands.  No 
beliefs,  whether  of  the  law  of  action  and  reaction, 
or  of  any  other  sort,  will  rid  the  employers  and 
employees  of  the  fundamental  conflict  which  re¬ 
sults  from  this  diversity  of  interests. 

On  the  other  hand,  labor  and  employers  have  so 
many  things  in  common  that  they  can  learn,  if  they 
will,  to  work  in  recognition  of  this  law,  and  in  this 


100 


BUSINESS  FUNDAMENTALS 


way  they  can  save  themselves  from  much1  of  the 
trouble  which  otherwise  comes  to  them.  For  a 
broken  law  always  means  that  the  breaker,  or  some 
innocent  person  whom  he  involves  with  him,  will 
suffer  the  penalty. 

The  worker  must  learn  to  give  an  honest  day’s 
work.  Without  this  an  honest  day’s  pay  does  not 
benefit  him.  No  one  can  take  out  of  a  job  more 
than  he  puts  into  it  without  hurting  himself.  This 
kind  of  action  is  hurting  millions  of  workers  right 
now.  The  higher  cost  of  everything  a  working  man 
buys  is  accounted  for,  in  part,  by  the  fact  that  he 
and  thousands  of  his  fellows  took  out  of  their  job 
more  than  they  put  in.  If  every  dollar  of  wages  got 
a  dollar  of  work,  other  things  being  equal,  the  dol¬ 
lar  would  continue  to  buy  a  dollar’s  worth  of  stuff. 

T he  employee  makes  his  biggest  mistake  when  he 
thinks  that  in  doing  less  than  a  dayys  work  he  is 
hmrting  the  boss .  Maybe  he  is ;  but  he  is  in  the  long 
run  hurting  himself  and  every  other  worker  more 
than  he  is  hurting  the  boss. 

It  is  a  strange  fact  that  this  entirely  wholesome 
doctrine  seems  to  be  better  understood  by  the  rad¬ 
ical  Amalgamated  Clothing  Workers  than  it  is  by 
the  old-fashioned  American  working  men,  who 
make  up  some  of  the  other  labor  bodies.  Start  in 
to  have  a  house  built,  or  rebuilt,  if  you  want  to  see 
how  little  the  average  building  trade  worker  appre¬ 
ciates  this  fact.  It  has  never  dawned  upon  him 
that  the  reason  he  has  to  pay  such  high  rent  for  his 


MANAGING  MEN  AND  ECONOMIC  LAW  IOI 

house  is  to  be  traced  back,  largely,  to  the  fact  that, 
when  you  hire  him  to  build  one  for  you,  he  does 
half  a  day’s  work  instead  of  a  whole  one.  Such 
workers  need  to  go  to  Mr.  Sidney  Hillman,  of  the 
Amalgamated  Clothing  Workers,  and  hear  him  tell 
his  own  people,  that  anything  which  injures  their 
industry  directly  injures  them. 

But  the  employees  are  not  the  only  people  who 
need  to  learn  the  truth  of  the  law.  The  employers 
also  need  it.  Perhaps  they  need  it  even  more  than 
the  employees.  T he  outstanding  mistake  of  the  em¬ 
ployer  is  his  failure  to  realize  that  he  is  dealing  with 
human  material.  He  must  realize  that  the  men  and 
women  who  work  for  him  are  men  and  women,  and 
that  they  are  to  be  treated  as  such.  He  has  intelli¬ 
gence  to  deal  with,  even  though  it  is  in  many  cases 
rudimentary,  and  that  intelligence  will  react  to  his 
attitudes,  just  as  surely  as  will  the  intelligence  of 
his  customers  and  of  his  business  associates. 

The  distressing  thing  about  the  law  of  action  and 
reaction,  when  applied  to  human  industrial  rela¬ 
tions,  is  that  it  is  hard  to  chart.  It  is  seen  only  as  we 
see  its  results.  If  the  law  came  up  and  hit  us  in  the 
face  every  time  we  break  it,  as  does  the  law  of 
gravitation,  we’d  not  forget  it.  But  the  penalty  or 
reaction  is  so  long  delayed,  in  many  cases,  that  we 
forget  the  law  altogether.  The  result  is  that  many 
of  the  ills  which  now  afflict  industry  on  its  human 
side  are  the  delayed  penalties  for  the  law  breaking 
of  men  dead  and  gone. 


102 


BUSINESS  FUNDAMENTALS 


This  industrial  relationship  is  no  place  for  any 
kind  of  charity.  What  ought  to  come  about  is  a 
realization  that  the  relation  between  employer  and 
employee  is  fundamentally  a  business  relationship. 
This  is  in  consequence  of  the  fact  that  we  have  in¬ 
telligence  to  deal  with.  Just  as  fast  as  intelligence 
grows,  comes  a  resentment  over  any  hint  of  charity, 
or  talking  down.  The  more  our  men  know,  the 
more  they  demand  that  they  be  treated  as  men. 

One  thing  seems  to  be  emerging  from  the  con¬ 
flict  between  employer  and  employee,  and  that  is 
labor’s  growing  insistence  on  a  right  to  a  say,  on 
equal  terms,  regarding  the  things  that  directly  con¬ 
cern  it  in  the  industrial  relation.  The  employer 
who  does  not  realize  this  is  going  to  run  against  it 
ever  more  forcibly  in  the  years  right  ahead.  The 
wage  worker  can  no  longer,  in  the  mass,  be  treated 
as  a  dependent  or  as  a  child.  He  must  be  treated 
as  a  man  and  be  granted  a  man’s  right  to  his  own 
say  about  things.  More  will  be  said  about  this  in 
the  next  chapter.  At  present  we  wish  to  call  atten¬ 
tion  to  the  fact  that  this  is  the  real  meaning  of  the 
trade  union  movement ;  it  is  labor’s  effort  to  get 
itself  into  a  position  where  it  can  have  its  say. 

Employers  must  recognize  this  tendency  and 
grant  this  right.  Somehow,  in  some  way,  the  wage 
worker  of  to-day  and  tomorrow  will  find  expres¬ 
sion.  It  may  be  in  the  union;  it  may  be  in  the  shop 
committee,  it  may  be  in  some  other  way.  But  some¬ 
how  he  is  going  to  be  consulted  and  to  take  up  his 


MANAGING  MEN  AND  ECONOMIC  LAW  103 

duties,  not  because  the  boss  says  so,  but  because  he 
has  himself  voluntarily  agreed  to  the  terms  and 
conditions  of  those  duties. 

We  have  seen  during  the  years  since  1918  a  large 
growth  of  the  shop  committee  movement.  There  are 
nearly  a  thousand  of  these  committees  in  operation 
in  the  United  States.  In  too  many  cases  the  move¬ 
ment  is  a  device  on  the  part  of  the  employer  to  get 
rid  of  the  trade  union.  Whatever  the  conditions, 
however,  the  shop  committee  will  function  success¬ 
fully  just  so  far  as  it  is  an  honest  effort  on  the  part 
of  the  employer  to  give  his  employees  a  chance  to 
become  vocal.  Any  employer  who  tries'  a  shop  com¬ 
mittee,  with  the  idea  that  he  will  be  able  thereby 
to  put  something  over  on  his  employees  which  he 
could  not  otherwise  get  past  their  intelligence,  is 
doomed  to  be  disappointed.  The  shop  committees 
which  are  doing  the  best  work  to-day  are  those 
which  give  the  largest  amount  of  determination  to 
the  workers.  This  is  natural.  What  you  put  in 
you  take  out.  If  you  sow  the  expectation  of  respon¬ 
sibility ,  you  will  get  the  acceptance  of  it.  If,  on  the 
other  hand,  one  uses  any  sort  of  human  machinery 
to  drug,  dope,  bamboozle  employees,  he  will  find 
that  they  ignore  him  when  his  back  is  turned  and 
he  will  be  quite  fortunate  if  they  are  as  considerate 
as  that. 

These  two  things,  then,  wait  upon  a  realization 
of  the  working  of  the  law:  a  general  willingness 
to  give  a  day’s  work  for  a  day’s  pay,  and  a  willing- 


104  BUSINESS  FUNDAMENTALS 

ness  to  give  to  employees  the  part  of  men  and 
women,  rather  than  to  regard  them  as  cogs  on  the 
wheel.  To  a  great  degree  these  two  go  hand  in 
hand  and  must  come  about  simultaneously.  They 
mean  a  new  deal  in  most  of  our  shops.  It  rather 
seems  as  if  the  first  move  would  have  to  be  made 
by  the  employer.  In  that  case  much  depends  on 
the  employer’s  genuine  conviction  of  the  whole¬ 
someness  of  ,what  he  is  trying  to  do  and  his  deter¬ 
mination  to  play  the  game  square.  The  man  who 
is  not  ready  for  this  had  better  keep  his  club  —  for 
he  will  have  use  for  it. 

The  employer,  however,  who  is  ready  to  ex¬ 
tend  honest  co-operation  to  his  employees  and  who 
is  willing  to  go  wherever  that  leads  him,  can  count 
on  getting  that  back  again  from  his  employees.  The 
law  will  work.  It  will  work  anyway.  What  we  get 
out  of  it  depends  on  what  we  put  into  it. 


Chapter  VIII 


SOLVING  THE  PRODUCTION 
PROBLEM 

BEYOND  doubt  the  great  problem  of  civiliza¬ 
tion  is  the  problem  of  production.  Our  work¬ 
men  are,  on  the  whole,  the  most  efficient  in  the 
world.  Save  possibly  pre-war  Germany,  no  nation 
has  gone  so  far  as  we  have  in  machine  methods  and 
quantity  production.  Still,  the  total  production  of 
the  United  States  per  year,  according  to  the  best 
figures  obtainable,  is  about  $60,000,000,000,  and  if 
this  sum  were  divided  equally  among  the  popula¬ 
tion,  the  sum  received  by  each  would  not  be  suffi¬ 
cient  to  support  the  people  of  the  United  States  in 
health,  comfort,  and  decency. 

The  $60,000,000,000  is,  of  course,  not  evenly 
distributed.  Some  few  at  the  top  get  very  much 
more  than  others  at  the  bottom.  In  consequence, 
thousands  farther  down  the  line  get  very  much  less 
than  their  proportional  share  and  are,  by  that  much, 
further  still  from  the  standard  set  for  decent  and 
efficient  living.  This  faulty  distribution  only  com¬ 
plicates  still  more  a  problem  that  is  inherent  in  the 
situation. 

Even  if  we  had  perfect  and  equal  distribution  — 


10 6  BUSINESS  FUNDAMENTALS 

if  we  had  Socialism  or  Communism  or  any  of  the 
“  isms  ”  that  propose  to  make  a  paradise  for  us  — 
we  would  still  be  confronted  with  the  basic  fact  that 
,we  are  2  5  per  cent,  short  of  enough  to  go  around. 
We  need  at  least  $80,000,000,000  annual  produc¬ 
tion  to  give  to  each  individual  the  required  standard 
of  life,  even  if  the  distribution  were  equable  and 
proportional.  The  great  problem  of  civilization  in 
the  United  States  is  then:  How  shall  we  add  25 
per  cent,  to  our  annual  production? 

There  are  several  avenues  of  approach  to  this 
question.  One  is  that  suggested  by  the  report  of 
Mr.  Hoover’s  committee  on  waste  in  industry.  This 
committee  says  that  at  least  50  per  cent,  of  waste 
exists  in  even  our  best  managed  industries.  The 
report  goes  on  to  apportion  this  waste  among  the 
different  factors  in  the  producing  machine.  A  large 
part  of  the  waste  is  frankly  charged  up  to  faults  of 
management.  The  answer  to  the  problem,  according 
to  the  committee,  is  to  give  the  efficiency  engineer  a 
chance  to  eliminate  the  waste  that  could  be  taken 
care  of  by  improved  engineering  methods. 

I  have  no  fault  to  find  with  the  suggestions  of 
this  report,  but  for  our  present  purposes  we 
wish  to  come  at  this  problem  from  a  different  angle. 
There  is  no  doubt  that  we  are  face  to  face  with  a 
problem  more  complicated  than  that  of  mere  engi¬ 
neering.  The  engineers  could  do  much  for  us,  if 
they  had  a  chance,  and  their  remedy  is  one  of  the 
remedies  that  should  be  prescribed  to  meet  the  needs 


SOLVING  THE  PRODUCTION  PROBLEM  107 

of  the  case.  Deeper  than  this  is  the  fact  that  we 
must  love  to  produce. 

Production  has  never  been  the  basic  motive  of 
business  3  at  most  it  has  been  but  secondary.  The 
main  motive  has  been,  not  production,  but  profits. 
Our  industries  are  not  organized  for  production; 
they  are  organized  for  profit  making.  The 
wide  and  fundamental  gap  between  the  two  is 
indicated  in  that  stimulating  book  of  the  late  Henry 
L.  Gantt,  published  shortly  after  his  death,  entitled 
“  Organizing  for  Work.”  If  we  are  going  to  solve 
this  problem  of  production,  we  must  raise  up  a  race 
of  producers  —  we  must  organize  industry  to  that 
end.  Some  new  convolutions  must  be  developed 
in  the  human  brain.  The  ideals  of  life  must  be 
reformed. 

If  our  forecasts  are  correct,  we  are  starting  now 
upon  a  new  phase  of  business  in  the  United  States. 
Ever  since  1893  we  have  been  travelling  with  a  ris¬ 
ing  market.  Everything  has  been  going  up.  Prices, 
wages,  living  costs  —  everything  concerned  with  the 
maintenance  of  life  and  of  business  activity  has  been 
slowly  and  continuously  rising  for  nearly  thirty 
years.  Under  such  a  condition  appropriate  laws 
and  methods  of  doing  business  grow  up.  Practically 
all  of  the  men  who  are  active  in  business'  to-day 
have  never  had  any  experience  with  business  under 
any  other  conditions  than  those  of  a  rising  market. 
All  the  rules  they  know  by  experience  are  the  rules 
which  fit  such  conditions. 


108  BUSINESS  FUNDAMENTALS 

With  the  beginning  of  1920  this  country  may 
have  started  upon  what  may  be  a  twenty-five-year 
period  to  be  marked  by  directly  opposite  conditions. 
Everything,  broadly  speaking,  may  go  down.  Prices, 
wages,  costs  of  living  —  all  the  main  factors  —  may 
be  on  a  descending  scale  for  the  next  twenty  to 
thirty  years.  It  is  fundamental  to  business  success 
in  the  years  right  ahead  that  business  men,  workers 
—  everybody  —  get  hold  of  this  basic  change  in  the 
situation  and  learn  to  do  business  under  it.  Most 
of  all,  it  is  needful  to  keep  this  great  fact  in  mind. 
We  shall  have,  from  time  to  time,  as  we  go  on, 
periods  like  the  summer  of  1922  when  the  trend  of 
prices  will  seem  to  be  upward.  We  must  not  be 
deceived  by  such  transitory  symptoms,  which  are 
but  eddies  in  the  main  stream,  while  still  the  broad 
movement  is  the  downward  one  to  which  we  have 
referred. 

Labor  and  labor  management  are  going  to  be 
fundamentally  different  while  this  condition  lasts 

1. 

from  what  they  have  been  in  the  experience  of  the 
men  who  are  now  managing  our  businesses.  The 
main  objective  in  labor  management  for  the  past 
thirty  years  has  been  to  successfully  and  wisely  re¬ 
sist  excessive  increases  in  wages.  That  period  has 
gone.  For  the  next  twenty-five  years  the  main  job 
in  labor  management  may  be  that  of  successfully 
'piloting  labor  through  a  period  of  falling  wages. 

This  is  not  a  call  for  promiscuous  and  excessive 
wage  cuts.  The  words  used  above  have  been  care- 


SOLVING  THE  PRODUCTION  PROBLEM  IO9 

fully  chosen.  Still,  it  remains  that  the  man  who 
gets  business  and  who  makes  money  for  the  next 
twenty-five  years  will  be  the  man  who  succeeds  in 
giving  unusual  quality  at  the  lowest  price.  The 
entire  problem  of  successful  merchandising  re¬ 
volves  around  that  one  fact.  Therefore,  among  the 
foremost  items  of  successful  manufacturing  is  to  be 
that  of  reducing  labor  costs,  and  a  good  part  of  that 
must  come  through  a  gradual,  wise,  and  successful 
lowering  of  wage  rates. 

Labor  is  going  to  react  to  this  fact.  It  is  reacting 
to  it  now.  As  was  stated  in  the  preceding  chapter, 
labor  was  very  slow  in  getting  hold  of  the  fact  that 
the  situation  had  changed.  The  shopmen’s  railroad 
strike  of  the  summer  of  1922  was  an  illustration  of 
the  common  reaction  of  labor  to  the  new  conditions. 
Heretofore  we  have  had  to  deal  with  a  labor  force 
that  was  militant,  aggressive,  triumphant.  During 
the  next  few  years  we  are  going  to  deal  with  a  labor 
force  that  is  sullen,  resentful,  and  dogged.  The 
weapon  of  such  labor  is  sabotage  l  Our  labor 
troubles  of  the  past  have  been  bad  enough,  but  they 
do  not  for  a  moment  measure  up  in  perplexity  to 
those  that  we  are  going?  to  have.  The  man  who 
goes  on  strike  for  more  pay  is  difficult,  but  he  is 
not  nearly  as  bad  to  deal  with  as  the  man  who 
throws  a  monkey  wrench  into  the  machine.  That 
is  the  kind  of  a  worker  that  is  liable  to  be  produced 
in  the  business  phase  which  we  are  now  entering. 
If  what  we  have  written  above  is  correct,  the  most 


no 


BUSINESS  FUNDAMENTALS 


important  thing  for  employers  to  do  in  the  years 
right  ahead  is  to  change  labor  management  to  con¬ 
form  to  the  new  conditions. 

At  the  bottom  of  this  new  attitude  of  labor  is 
ignorance  of  the  real  conditions.  Wherever  ig¬ 
norance  exists  the  thing  to  do  is  to  turn  on  the  light. 
If  your  employees  knew  as  much  about  your  prob¬ 
lems  as  you  doy  their  reaction  to  them  would  be  the 
same  as  your  own .  You,  in  your  office,  do  what 
you  can  to  inform  yourself  about  business  con¬ 
ditions.  You  read  all  the  reports  available.  You 
receive  information  through  your  business  asso¬ 
ciation  and,  full  of  this  knowledge,  you  go  before 
your  employees  to  ask  for  a  reduction  in  wages  or 
for  some  new  conditions  which  will  cheapen  unit 
production  costs.  But  your  employees  are  utterly 
destitute  of  the  knowledge  which  has  brought  you 
to  your  conclusions.  All  that  they  see  in  your  pro¬ 
posal  is  reduced  wages,  lower  standards  of  living, 
and  a  plan,  hatched  up  by  a  hostile  employer,  to 
take  advantage  of  them.  Consequently,  they  resist. 
What  seems  axiomatic  to  you,  seems  to  them  like 
injustice. 

If  they  had  your  background,  they  would  feel 
as  you  feel. 

The  answer  is:  Give  them  the  information! 

We  feel  that  this  suggestion  is  the  one  big  thing 
that  we  have  to  say  to  our  employer  clients  at  this 
time.  All  of  the  material  which  the  Babson  Statis¬ 
tical  Organization  furnishes  to  its  clients  on  funda- 


SOLVING  THE  PRODUCTION  PROBLEM  III 

mental  business  conditions  and  upon  industrial  prob¬ 
lems,  must  be  reshaped  for  presentation  to  your 
employees.  They  must  be  enabled  to  look  at  things 
through  the  same  eyes  as  yourself. 

For  example,  take  the  Babsonchart.  It  is  a  pic¬ 
ture  of  business  conditions,  presenting  in  graphic 
form  what  you  are  contending  with  in  the  general 
business  situation.  Use  such  a  chart  with  your  em¬ 
ployees.  We  base  all,  of  our  business  forecasts  upon 
this  chart.  You  should  use  this  chart  or  some  other 
to  pass  these  things  along  to  your  employees.  Have 
these  charts  copied  on  a  large  scale  or  put  upon  a 
lantern  slide,  and  kept  up-to-date.  Then  you,  or 
your  employment  manager,  must  regularly  and  fre¬ 
quently  explain  what  the  charts  mean  to  the  em¬ 
ployees.  Simple  language  with  much  repetition 
and  almost  infinite  patience  will  be  required  5  but  it 
will  be  worth  while. 

In  similar  fashion,  the  particular  problems  of 
your  own  industry  must  be  presented.  What  is 
the  nature  of  the  competition  you  have  to  meet? 
How  many  plants  are  in  competition  with  you? 
Where  are  they?  What  advantages  do  they  possess 
over  you,  if  any,  in  making  or  marketing  their  prod¬ 
uct?  What  is  the  total  producing  power  of  the 
country  in  your  industry?  What  is  the  probable 
consuming  power?  All  of  the  material  can  be 
graphically  presented,  like  the  Babsonchart,  and  ex¬ 
plained  in  detail  to  employees. 

Likewise,  take  up  the  prices  of  your  product. 


4 


1 12  BUSINESS  FUNDAMENTALS 

What  happened  to  them  during  the  war?  What 
has  happened  since?  What  is  going  to  happen? 
Where  must  your  prices  be  —  what  course  must 
they  take  —  in  order  for  you  to  get  business  and 
keep  the  plant  running?  Take  up  the  question  of 
[wages.  What  has  been  the  course  of  wages  in  the 
country  as  a  whole  during  the  war  and  since?  What 
has  been  the  course  of  wages  in  your  plant?  How 
does  this  compare  with  the  course  of  wages  as  a 
whole  and  with  the  course  of  wages  in  your  com¬ 
petitor’s  plants? 

What  about  the  cost  of  living?  The  United 
States  Bureau  of  Labor  Statistics  prepares  regular 
reports  on  this  subject.  Have  your  employees  seen 
them?  Do  they  realize  what  these  reports  mean? 
Perhaps  they  do  not  believe  that  these  reports  are 
true.  If  that  is  the  case,  the  thing  for  you  to  do 
is  to  have  your  employees  join  you  in  preparing 
local  cost-of-living  reports  which  they  will  accept 
as  true. 

So  on  all  down  the  line.  It  may  even  be  that  you 
will  find  it  to  your  advantage  to  go  so  far  as  to 
acquaint  your  employees  with  the  profits,  or  losses, 
that  you  are  making.  Workers  quite  generally 
think  that  the  boss  is  making  a  pile  of  money.  For 
this  reason,  they  do  not  accept  at  full  value  any 
pleas  for  ,wage  reduction  or  increased  efficiency  that 
he  may  make.  The  balance  sheet  is  the  answer. 
Others  have  done  it.  Why  not  you?  At  any  rate 
you  can  show  them  the  unit  production  cost  record. 


SOLVING  THE  PRODUCTION  PROBLEM  II3 

And  if  you  can  find  a  way  to  compare  your  own 
figures  with  those  of  your  competitors,  you  will  do 
well.  Some  of  our  industries  which  have  effective 
associations  have  this  material  available. 

I  hope  that  genuine  'profit  sharing  has  a  great 
future  ahead  of  it  in  the  phase  just  begun.  Notice 
that  I  say  genuine  profit  sharing.  Much  of  the 
prejudice  against  profit  sharing  comes  from  the  fact 
that  it  has  seldom  been  tried.  There  are  only  eight 
or  ten  real  profit-sharing  plants  in  the  country. 
Profit  sharing,  to  be  genuine,  must  give  to  the  em¬ 
ployees  a  percentage,  announced  in  advance,  of  the 
profits  of  the  concern.  Obviously,  the  percentage 
will  fluctuate  up  or  down  with  the  profits.  Obvi¬ 
ously  also,  the  profits  must  be  known.  In  our  office 
we  post  the  record  each  month  and  every  employee 
knows  twelve  times  a  year  what  the  firm  is  doing 
in  the  way  of  profits  and  exactly  how  much  money 
has  been  transferred  to  the  profit-sharing  account. 

Have  in  mind  what  you  are  doing,  or  trying  to  do, 
with  labor  in  this  present  stage  of  business.  You 
are  asking  your  employees  to  work  with  you .  That 
is  fundamentally  different  from  asking  them  to 
work  for  you .  If  they  are  to  work  with  you,  it  is 
but  natural  and  reasonable  that  they  have  some  of 
the  same  incentives  that  you  yourself  have.  To  say 
that  the  logic  of  profit  sharing  is  loss  sharing  is 
aside  from  the  point.  Your  employees  are  not 
working  on,  the  same  margin  as  yourself.  Even 
with  profit  sharing,  they  will  not  be  rich.  What 


1 14  BUSINESS  FUNDAMENTALS 

among  them  is  spread  over  a  large  number,  with 
you  is  divided  up,  in  most  cases  among  a  few.  Still, 
it  should  be  remembered  that  there  are  cases  of  long 
standing  and  conspicuous  success,  where  the  em¬ 
ployees  have  joined  loss  sharing  with  profit  sharing. 
It  merely  shows  what  can  be  done  when  the  spirit 
is  right. 

By  the  time  you  have  gone  the  distance  which 
we  have  thus  far  indicated,  you  will  come  to  the 
place  where  the  dreaded  efficiency  system,  which 
labor  usually  hates  like  poison,  with  its  stop  watch 
and  time  studies  and  speeding-up  program,  can  be 
put  in,  with  the  entire  consent  of  the  employees  and 
with  every  chance  of  success.  Thus,  what  Mr. 
Hoover’s  committee  on  waste  has  called  to  our  at¬ 
tention  can  be  made  available  under  the  right  con¬ 
ditions.  These  things  have  all  been  done;  done 
under  the  old  conditions.  They  are  not  theoretical 
fancy.  The  present  calls  for  them.  They  are  the 
way  of  salvation  and  success  in  the  times  that  we 
are  now  passing  through. 

The  man  who  undertakes  a  movement  like  this 
must  be  a  man  of  real  faith.  He  must  have  faith 
in  human  nature,  as  he  finds  it  among  his  employees. 
He  must  have  faith  in  the  wisdom  of  the  plan.  And 
he  must  be  prepared  to  go  the  whole  distance.  It 
is  idle  to  start  upon  a  plan  like  this  and  stop  half¬ 
way.  All  of  the  cards  must  be  laid  on  the  table. 
Absolute  candor  and  frankness  are  needed  to-day 
in  dealing  with  labor.  Only  thus  will  the  reaction 


BRIGHTON  BRANCH 


SOLVING  THE  PRODUCTION  PROBLEM  II5 

be  genuine  and  hearty.  Our  men  are  ready  to  work 
with  us,  just  as  soon  as  and  to  the  extent  that  they 
find  us  ready  to  work  with  them.  If  we  want  ser¬ 
vants,  we  can  have  them  by  being  taskmasters.  If, 
on  the  other  hand,  we  want  partners,  we  must  be 
prepared  to  treat  our  employees  as  partners.  We 
cannot  combine  the  two  conceptions.  It  is  servants 
or  partners.  Which  we  have  will  depend  upon 
ourselves.  It  is  my  conviction  that  servants  cannot 
do  the  work  that  the  world  needs  in  the  next 
twenty-five  years.  That  extra  25  per  cent,  of  pro¬ 
duction  cannot  be  got  out  of  slaves.  Only  free  men, 
working  gladly  and  with  hearty  co-operation,  can 
give  us  the  output  that  we  need. 


Chapter  IX 


METHODS  OF  MARKETING 


SOMETHING  is  wrong  with  the  usual  method 
of  doing  business:  results  prove  it.  Do  you 
realize  that  losses  from  failures  equal  —  or  exceed 
—  losses  from  fires?  Losses  by  fire  for  ten  years 
were  $2,492,428,170.  For  this  same  period  losses 
from  business  failures  were  $2,904,100,000. 

What  is  the  trouble?  In  my  opinion  it  is  due  in 
large  part  to  the  excessive  booms  and  the  resulting 
disastrous  panics  5  in  other  words,  to  these  same 
fluctuations  of  business  caused  by  lack  of  adjustment 
between  production  and  distribution. 

We  have  made  tremendous  strides  in  production, 
but  we  have  lagged  far  behind  in  distribution.  If 
you  compare  production  to  the  automobile ,  then 
distribution  may  be  typified  by  the  ox-cart. 

Do  you  realize  what  we  have  accomplished  in 
production?  In  the  making  of  boots  and  shoes, 
work  which  formerly  by  hand  methods  required 
nine  hours  requires  but  one  by  machinery.  In  the 
manufacture  of  laundry  soap,  work  formerly  re¬ 
quiring  twenty  hours  now  takes  but  one.  Even 
greater  savings  occur  with  other  articles.  In  mak- 

116 


METHODS  OF  MARKETING  117 

mg  hammers  or  plows,  where  formerly  about 
thirty-two  hours  were  required,  we  now  need  but 
one  hour.  In  the  case  of  certain  machine  parts 
which  can  now  be  made  in  one  hour  the  time  re¬ 
quired  by  hand  methods  was  over  4,000  hours.  The 
general  average  for  all  articles  is  about  250  to  one. 
In  other  words,  where  by  hand  methods  250  hours 
of  labor  were  required  to  produce  a  certain  product, 
but  one  hour  is  now  needed. 

Compare  this  extraordinary  advance  in  the  effi¬ 
ciency  of  production  with  the  corresponding  devel¬ 
opment  in  distribution.  It  is  absurd  even  to  suggest 
that  efficiency  of  distribution  has  been  increased  in 
anything  like  the  ratio  of  250  to  one.  In  fact,  from 
many  standpoints,  it  may  be  questioned  whether  we 
have  made  any  advance  at  all  in  distribution.  I 
have  at  hand  certain  preliminary  figures  suggesting 
that  there  are  various  kinds  of  merchandise  which 
cost  more  to  market  than  to  make.  On  a  dollar 
article,  for  example,  the  cost  to  make  may  be  ex¬ 
pected  to  be  40  cents,  and  the  cost  to  distribute,  60 
cents.  I  have  no  doubt  that  even  greater  discrep¬ 
ancies  might  be  found.  What  steps  can  we  take  to 
bring  distribution  and  production  more  into  align¬ 
ment  and  correct  adjustment?  If  we  can  find  even 
a  partial  answer  to  this,  we  shall  do  much  toward 
reducing  the  wild  fluctuations  of  the  business  cycle. 

We  should  bring  to  bear  upon  the  problem  of 
distribution  the  same  scientific  approach  which  has 
been  so  successfully  applied  to  production.  Selling 


1 1 8  BUSINESS  FUNDAMENTALS 

has  been  largely  a  matter  of  guesswork,  but  we  must 
place  it  squarely  upon  the  foundation  of  facts  first. 
As  a  concrete  and  specific  example  of  what  I  mean 
by  facts  first,  see  the  analysis  at  the  close  of  this 
chapter.  It  is  by  no  means  complete,  but  it  is  sug¬ 
gested  as  a  starting  point.  I  should  like  to  see  every 
reader  apply  this  analysis  to  his  own  business,  or  to 
work  out  a  similar  analysis. 

After  you  have  applied  it  certain  facts  will 
emerge.  You  will  discover  that  you  are  selling  or 
should  sell  primarily  on  the  basis  of  industry.  If 
you  are  making  motor  trucks,  for  example,  you  will 
find  that  your  customers  divide  themselves  into  cer¬ 
tain  industrial  groups,  such  as  the  iron  and  steel 
industry,  the  lumber  industry,  and  so  on  through 
the  dozen  or  more  classifications  of  manufacturers 
and  producers.  If  this  is  the  way  in  which  your 
business  naturally  aligns  itself,  then  your  distribu¬ 
tion  should  be  primarily  based  upon  the  study  of 
industries.  In  another  chapter  this  question  of  sell¬ 
ing  by  industries  has  been  considered  at  greater 
length. 

In  many  instances,  however,  a  business  cannot 
well  be  classified  by  industry.  For  example,  if  you 
are  selling  food  products,  clothing,  musical  instru¬ 
ments,  and  other  articles  of  final  consumption,  you 
will  find  that  the  more  practical  classification  is  by 
localities.  Therefore,  a  separate  chapter  is  devoted 
to  this  alternate  problem  of  selling  a  city. 

During  the  past  two  years  I  have  studied  and 


METHODS  OF  MARKETING  119 

analyzed  both  the  plans  and  the  results  of  several 
hundred  sales  and  advertising  campaigns — ^cam¬ 
paigns  that  succeeded  and  campaigns  that  failed. 
Detailed  study  of  the  latter  indicates  that  at  least 
80  per  cent,  of  those  that  fail  do  so,  not  because  of 
a  faulty  plan  or  poor  execution,  but  because  they 
were  builded  upon  a  foundation  of  assumption, 
guesswork,  or  half  truth  instead  of  on  sound  fact. 
Millions  in  money  and  thousands  of  hours  in  earnest 
effort  have  been  spent  in  a  futile  effort  to  sell  mouth 
organs  to  deaf  men. 

As  a  small  contribution  to  better  business,  I  have 
prepared  a  standard  merchandising  analysis.  We 
hope  that  it  will  help  to  eliminate  this  greatest 
cause  of  failure  in  marketing.  It  is  simple  and  ele¬ 
mental.  If  time  and  money  permit,  we  advise  a 
much  more  extensive  survey.  In  any  case,  however, 
an  hour  or  two  spent  in  examining  your  problem  on 
the  fifty  points  outlined  will  help  to  clarify  it  in 
your  own  mind  and  will  tend  to  eliminate  50  per 
cent,  of  the  chance  for  failure  or  half-hearted  suc¬ 
cess.  It  is  the  most  valuable  hour  you  can  put  in  on 
any  sales  or  advertising  problem. 

Remember,  facts  first  —  get  the  facts,  or  the 
facts  will  get  you. 


120 


BUSINESS  FUNDAMENTALS 


BABSON  MERCHANDISING  ANALYSIS 
Economic  Factors 

Prospect 

f 

1.  Who  is  your  prospect? 

What  is  his  or  her  position  in  the  social  and  business 
world? 

Get  as  definite  a  description  as  you  can  of  the  man  or 
woman  you  must  sell. 

2.  How  large  is  your  market? 

Total  number  of  prospects? 

Rate  of  growth  or  number  of  new  prospects  available 
each  year? 

3.  Where  are  these  prospects  located? 

How  many  in  each  section  of  the  country? 

Division  by  states  if  possible. 

Are  the  majority  located  in  large  cities,  small  towns,  of 
rural  and  farming  communities? 

4.  What  is  the  prospect’s  relative  prosperity? 

Income  compared  with  a  year  ago? 

Relative  position  of  the  industry  upon  which  he  is 
dependent? 

In  which  month  of  the  year  is  he  most  prosperous? 

5.  What  portion  of  the  market  is  already  sold? 

How  many  of  the  possible  prospects  already  buy  from 
you  regularly? 

What  portion  buy  occasionally? 

How  many  do  not  buy  at  all? 

Competition 

6.  What  is  being  used  now  in  place  of  your  product  or 

service? 

List  competing  articles  or  services. 


METHODS  OF  MARKETING 


1 21 


7.  Advantages  of  competition? 

List  both  apparent  and  real  advantages  of  the  competing 
articles  or  services. 

8.  Advantages  over  competition? 

List  the  advantages  of  your  product  or  service  over  that 
of  your  competitor. 


Distribution 

9.  Cost  of  product  or  service. 

{a)  Cost  of  raw  materials . $■ 

(b)  Cost  of  labor  and  overhead  cost  .  .  $ 

(*:)  Total  manufacturing  cost  .  $ 

(d)  Selling  cost  .  $ 

(e)  Profit  . $■ 

(/)  Selling  price  . $ 

(g)  Retail  price  .  $■ 


Tabulation  of  the  costs  where  possible  is  very  helpful.  If 
labor  and  overhead  cost,  for  instance,  is  much  greater  than 
the  cost  of  the  material,  the  price  can  in  most  cases  be 
cut  materially  by  volume  production.  In  this  case,  it  may 
be  well  to  set  low  prices  in  order  to  get  that  volume. 
If  material  costs  make  up  the  largest  portion  of  your  manu¬ 
facturing  cost,  volume  is  relatively  unimportant,  except  in  in¬ 
dustries  offering  large  discounts  for  quantity  purchases  of  raw 
materials. 

If  your  selling  cost  is  larger  than  your  total  manufacturing 
cost,  your  price  may  be  too  high  to  be  efficient.  Be  sure  that 
a  lower  price  would  not  sell  enough  more  goods  to  increase 
the  net  profits,  before  you  continue  with  a  program  that  must 
overcome  unusually  high  sales  resistance. 

Is  your  selling  price  determined  by  arriving  at  the  manu¬ 
facturing  cost  and  adding  all  the  traffic  will  bear,  or  is  it  de¬ 
cided  by  going  to  your  market  and  finding  out  what  the  public 
wants  to  pay  for  your  product?  Neither  of  these  processes 


122 


BUSINESS  FUNDAMENTALS 


are  entirely  satisfactory.  You  should  approach  the  problem 
from  both  points  of  view  and  set  a  price  somewhere  between 
the  two  extremes.  Be  sure  that  the  margin  between  your  sell¬ 
ing  price  and  the  retail  price  is  not  too  wide. 

10.  What  is  your  plan  of  distribution? 

Which  of  the  following  factors  do  you  employ  in  your 
scheme  of  distribution? 

(a)  Mill  agents  or  selling  agents 

( b )  Wholesalers 

(c)  Jobbers 

(d)  Retailers 

(e)  Consumers 

11.  What  are  the  avenues  of  distribution? 

Do  you  sell  through  branch  offices,  salesmen,  direct  by 
mail,  or  agents,  exclusive  or  non-exclusive? 

12  What  are  your  terms  to  the  customer? 

What  discounts  do  you  offer  for  cash? 

What  is  your  credit  policy? 

Do  your  discounts  for  quantity  help  in  selling,  or  do 
they  tend  to  overload  your  customer? 

How  about  dating? 

What  is  your  policy  regarding  return  goods? 

What  guarantees  are  you  willing  to  make  and  stand 
back  of? 

Psychological  Factors 

13.  What  are  your  fundamental  appeals? 

Consider  the  following  possible  appeals  and  number  in 
the  order  of  importance  in  relation  to  your  particular 
product  or  service: 

(a)  Profit 

(b)  Utility 

(c)  Curiosity 

(d)  Caution 

( e )  Pride 


METHODS  OF  MARKETING 


123 


14.  Is  your  product  known  or  unknown? 

Is  your  prospect  familiar  with  it  or  a  similar  article  or 
service? 

Does  he  already  appreciate  the  need  for  it,  or  must  he 
be  educated  to  use  it? 

15.  Is  your  product  considered  by  the  prospect  as  a  luxury  or 

essential? 

16.  Is  your  product  or  service  of  personal  nature  or  for  busi¬ 

ness  use? 

17.  Have  you  the  good  will  of  the  public? 

Is  your  firm  or  product  known  or  unknown? 

Favorably  or  unfavorably  known? 

18.  What  is  the  present  attitude  of  the  prospect  toward  your 

product  or  service? 

List  all  objections  encountered  in  a  sale. 

List  the  points  most  easily  understood,  and  those  which 
require  a  more  detailed  explanation. 

List  any  misapprehension  of  the  public  regarding  your 
product  or  service. 

19.  Exactly  what  must  the  campaign  accomplish? 

If  the  product  or  service  is  known,  and  has  features 
which  are  easily  grasped  by  the  public  mind,  a  compar¬ 
atively  simple  campaign  should  achieve  the  desired 
result.  If,  however,  a  good  deal  of  educational  work 
is  necessary,  a  more  extended  plan  will  be  required. 
Lay  out  a  rough  plan  of  the  campaign  that  will  be 
necessary. 

Cofy  Factors 

(For  the  preparation  of  both  advertising  and  sales  canvass) 

20.  What  one  point  must  the  message  convey? 

No  advertisement  is  large  enough  to  contain  two  ideas. 
To  insure  unity,  ask  yourself  what  action  is  desired, 
and  keep  that  definite  idea  in  mind  throughout  the 
preparation  of  the  advertisement  or  sales  canvass. 


I 


I 


124  BUSINESS  FUNDAMENTALS 

21.  Do  the  headline  and  illustration  insure  attention? 

Will  your  copy  be  seen  when  competing  with  half  a 
hundred  other  messages  for  the  attention  of  your 
prospect? 

Will  your  salesman’s  introduction  insure  a  hearing  for 
him?  1 

22.  Does  the  opening  paragraph  clinch  interest? 

Be  sure  that  the  message  is  presented  from  the  pros¬ 
pect’s  point  of  view.  Make  certain  that  his  advantage 
is  emphasized  rather  than  your  own. 

23.  Does  the  message  create  a  real  desire  to  own  or  use  the 

product  or  service  advertised? 

Desire  is  a  feeling  and  is  not  a  product  of  cold  logic. 

Make  your  message  breathe  and  live  with  illustration 
and  description  of  the  prospect  enjoying  the  use  of 
your  merchandise. 

24.  Does  the  close  outline  clearly  the  action  desired  and  urge 

to  act  quickly? 

Be  sure  that  you  tell  a  man  exactly  what  you  want 
him  to  do,  and  make  it  easy  for  him  to  do  it. 

25.  Does  your  copy  carry  a  distinctive  mark  or  style  that  will 

tie  it  up  with  your  other  efforts? 

The  accumulating  effect  of  several  different  appeals 
is  a  tremendous  force.  Be  sure  that  your  messages  are 
distinctive  enough  so  that  the  prospect  realizes  that  your 
product  is  the  same  product  that  he  was  reading  about 
last  month  —  that  this  is  the  machine,  the  equipment 
or  service  that  he  had  already  decided  to  buy. 

26.  Could  the  name  of  any  other  make  or  maker  be  substi¬ 

tuted  for  your  own? 

If  it  can,  your  advertisement  is  completely  worthless, 
except  that  it  may  do  a  certain  amount  of  educational 
work  for  the  good  of  the  whole  industry.  You  are 
advertising  for  the  benefit  of  your  competitor  as  well 
as  yourself. 


METHODS  OF  MARKETING  12$ 

27.  Is  it  completely  free  from  meaningless  slogans,  insignifi¬ 

cant  trademarks,  and  useless  words? 

These  examples  of  literary  deadwood  not  only  take  up 
valuable  and  expensive  space  and  make  the  message’s 
work  long  and  hard  to  read,  but  they  actually  befog 
and  confuse  the  mind  of  the  reader,  so  that  he  is  left 
with  a  very  indistinct  impression  of  what  you  are  trying 
to  tell  him.  Write  as  though  it  cost  a  dollar  a  word. 

28.  Does  the  copy  ring  true? 

When  completed  read  your  copy. 

Does  it  sound  as  if  it  were  in  earnest? 

Does  it  make  empty  claims  or  does  it  offer  evidence 
and  proof? 

If  it  offers  no  proof,  it  will  convince  no  one. 

Will  the  product  fulfill  the  promise? 

If  not,  improve  the  product. 

Display  Factors  —  Sample  Cases 

29.  Can  the  prospect  see  it? 

In  making  up  the  salesmen’s  sample  cases,  it  is  well  to 
remember  that  the  eye  is  much  quicker  than  the  ear. 
Samples  that  the  prospect  can  look  at,  handle,  or  work 
are  better  than  the  most  eloquent  description  ever 
written.  If  you  cannot  put  your  samples  in  the  sales¬ 
man’s  hands,  be  sure  that  he  is  provided  with  sample 
charts  and  photographs  that  will  tell  the  story. 

Publications 

30.  What  is  the  circulation? 

Where  is  it  located  geographically? 

What  per  cent,  of  the  readers  aro  prospects? 

Cost  per  page,  per  thousand  for  reaching  prospects? 
Magazines  offer  a  splendid  medium  for  educational 
work,  where  the  percentage  of  prospects  is  large  enough 
to  make  them  worth  while. 


126 


BUSINESS  FUNDAMENTALS 


31.  Trade  publications. 

If  you  are  interested  in  reaching  a  certain  line  of  busi¬ 
ness,  trade  publications  offer  a  circulation  without  waste. 
The  cost  in  this  case  should  be  compared  with  the 
problem  of  a  direct  mail  campaign  to  cover  the  same 
field. 

32.  Newspapers. 

The  largest  and  most  inexpensive  circulation  in  the 
United  States,  offering  an  unusual  opportunity  to  culti¬ 
vate  certain  localities.  Positions  in  the  various  sections 
of  the  paper  offer  still  further  chances  to  appeal  to  a 
definite  class.  Percentage  of  prospects  should  again 
decide  the  practicability  of  this  medium. 

33.  A  poster  display. 

Outdoor  bulletins  and  street  car  cards  offer  valuable 
space  if  your  product  is  of  general  use. 

34.  Direct  mail. 

By  selection  of  a  mailing  list  this  medium  can  be  used 
without  any  waste  circulation.  It  should  be  the  back¬ 
bone  of  any  campaign  which  is  to  concentrate  on  a 
limited  number  of  prospects,  and  should  be  used  in 
conjunction  with  regular  publication  advertising  in  the 
follow  up  and  cultivation  of  interested  prospects. 

The  duplicated  letter  offers  the  most  elastic  and  prac¬ 
tical  form  where  there  is  no  need  of  detailed  descrip¬ 
tion.  In  the  more  elaborate  presentations  the  details 
should  be  covered  in  a  printed  folder  or  booklet  which 
accompanies  the  letter.  Whenever  possible  illustrate 
the  product  and  show  it  in  use.  The  possibilities  for 
variety  in  direct  mail  material  are  almost  unlimited. 
Handled  intelligently,  it  offers  unusual  possibilities  for 
efficient  marketing. 

35.  Dealers’  helps. 

Window  display. 

Counter  stands.. 


METHODS  OF  MARKETING  1 27 

Samples  and  other  forms  of  advertising,  which  can  be 
placed  in  the  dealer’s  store,  or  presented  to  the  public 
through  him  are  of  tremendous  effect,  and  ordinarily 
the  cost  is  little  more  than  the  actual  preparation  of  the 
material  itself.  The  space  used  is  donated  by  the  dealer, 
and  the  final’  advantage  is  that  the  appeal  is  made  where 
the  goods  are  easily  accesible  and  can  be  procured  with¬ 
out  delay. 

36.  Miscellaneous. 

There  are  a  score  of  more  or  less  minor  classifications 
in  the  medium  field,  including  novelties,  exhibitions, 
demonstrations,  and  displays,  and  other  particular  forms 
which  are  adopted  to  serve  in  a  limited  field.  These 
should  be  considered  as  accessory  and  auxiliary  forces 
and  should  not  be  depended  upon  to  carry  the  heavy 
end  of  the  sales  message. 

Physical  Form 

37.  Type. 

It  is  well  to  stick  to  a  few  of  the  better-known  type 
faces.  Fancy  types  are  hard  to  read.  Small  type 
spaced  out  is  better  than  large  type  jammed  together. 
Getj  your  emphasis  by  the  use  of  italics  and  small 
caps,  rather  than  by  trying  to  mix  several  of  these  fam¬ 
ilies  of  type  into  a  single  layout. 

38.  Illustration. 

Make  the  picture  mean  something.  Make  it  emphasize 
a  single  point.  Make  it  help  sell.  Explain  the  pur¬ 
pose  of  the  advertisement,  and  a  good  commercial  artist 
will  know  what  form  of  handling  will  best  serve  your 
purpose.  Money  spent  for  effective  illustration  is  well 
invested. 

39.  Color. 

In  preparing  printed  matter  the  limited  use  of  color  has 


128 


BUSINESS  FUNDAMENTALS 


a  very  constructive  force.  It  is  better  to  use  too  little 
than  too  much.  Don’t  slap  it  on  with  a  trowel. 

40.  Paper. 

Paper  should  be  selected  for  the  work  it  is  to  do,  not  by 
the  price  per  pound.  Each  of  the  several  grades  has 
a  purpose.  If  you  are  not  familiar  with  the  different 
papers,  get  a  good  printer  and  let  him  select  the  right 
sheet  for  your  particular  case. 

Note  —  Wherever  possible  it  is  imperative  that  the  campaign 
be  tested  on  a  limited  field  of  prospects  before  it  is  adopted. 
The  observance  of  this  rule  in  conjunction  with  a  careful 
survey  will  practically  eliminate  the  chance  of  failure. 


Chapter  X 

SELLING  A  CITY 

IF  your  products  are  consumer’s  goods,  that  is, 
bought  by  the  general  public  rather  than  any  par¬ 
ticular  group  or  industry,  it  is  safe  to  say  that  your 
marketing  plan  should  be  built  for  the  city  as  a  unit. 
If  you  are  in  the  retail  business,  obviously  you  must 
operate  on  this  unit;  but  if  you  are  doing  a  national 
business  you  can  readily  increase  your  sales  effi¬ 
ciency  by  following  the  same  plan. 

Conditions  are  not  alike  in  any  two  cities  at  one 
time,  and  sales  possibilities  in  adjoining  localities 
may  differ  by  as  wide  a  margin  as  50  to  60  per  cent. 
It  is  ridiculous,  therefore,  to  assume  that  the  cam¬ 
paign  designed  to  sell  the  country  as  a  whole  will 
be  100  per  cent,  productive  in  each  of  these  various 
communities  under  all  of  these  different  circum¬ 
stances.  It  is  safe  to  say  that  sales  can  be  increased 
10  to  30  per  cent,  on  every  dollar  you  spend  in  ad¬ 
vertising  and  sales  effort,  if  you  will  take  the 
trouble  to  study  each  city  and  fit  your  plans  to  local 
conditions,  whatever  they  may  be. 

Here  are  a  few  of  the  things  that  decide  the  dif¬ 
ference  between  success  and  failure,  between  profit 
and  loss: 


129 


130  BUSINESS  FUNDAMENTALS 

St.  Louis,  for  example.  How  many  salesmen 
should  you  put  into  St.  Louis?  Can  you  adequately 
cover  this  city  with  two  men,  or  three,  or  four,  or 
a  dozen,  or  how  many?  Should  these  men  be  trav¬ 
eling  salesmen  or  resident  salesmen?  If  a  resident, 
should  they  have  desk-room  only  or  a  well-equipped 
sales  office?  Or  —  another  thought  —  can  your 
products  be  adequately  distributed  in  St.  Louis  by 
mail?  Going  to  the  other  extreme,  how  about  a 
warehouse  in  connection  with  the  sales  office?  How 
about  dealers  —  their  number,  their  volume  of  busi¬ 
ness,  their  probable  sales  of  your  particular  prod¬ 
uct?  Again,  is  St.  Louis  the  kind  of  a  city  you 
can  count  upon  for  a  long  pull  and  profitably  spend 
years  in  developing,  or  is  it  more  like  a  mining  camp 
or  oil  town  —  fit  only  to  be  plucked  quickly  while 
the  plucking  is  good?  Is  the  present  a  favorable 
time  to  approach  the  St.  Louis  market  or  will  it  be 
more  responsive  at  a  later  date? 

These  are  typical  questions  applying  to  any  city 
or  state  and  occurring  constantly  in  an  active  sales 
department.  The  credit  department  has  a  similar 
set  of  questions.  Should  credit  in  St.  Louis  be  ex¬ 
tended  liberally,  guardedly,  or  practically  not  at  all? 
Should  collection  efforts  be  mild,  medium,  or 
drastic?  Of  course,  it  all  depends  on  the  local  out¬ 
look.  Your  credit  and  collection  policies  depend  on 
whether  St.  Louis  is  on  the  eve  of  profound  de¬ 
pression  or  about  to  enjoy  a  record-breaking  pros¬ 
perity.  Then  comes  the  advertising  department 


SELLING  A  CITY 


131 

with  its  own  particular  questions.  How  much  news¬ 
paper  advertising  and  other  forms  of  publicity  will 
St.  Louis  repay?  Or  if  a  local  campaign  has  already 
been  run  and  recorded,  is  the  score  good,  bad,  or 
indifferent? 

There  are  always  two  questions  about  a  locality: 
first,  the  question  of  those  who  are  contemplating 
the  field  as  prospective  territory  5  second,  the  ques¬ 
tion  of  those  already  located  therein  and  desiring  to 
check  up  past  records  or  formulate  future  policies 
of  advertising,  selling,  credit  granting,  and  collect¬ 
ing.  Both  questions  depend  upon  a  precise  knowl¬ 
edge  of  the  local  situation  and  outlook.  Many  busi¬ 
ness  concerns  iwill  not  take  the  trouble  to  get  this 
knowledge.  They  are  governed  as  the  old-fash¬ 
ioned,  one-cylinder  gasoline  engine  was  governed 
—  by  the  “  hit  or  miss  ”  method.  This  will  not  be 
admitted  by  some  sales  managers,  advertising  men, 
and  credit  men,  who  claim  they  are  operating,  not 
by  luck  and  chance,  but  by  intuition. 

Intuition  is  a  wonderful  thing  —  when  it  works. 
I  have  a  great  respect  for  it  —  when  it  works.  But 
it  doesn’t  always  work.  Intuition  is  what  prompts 
a  hen  to  sit  on  china  eggs  as  optimistically  as  on  the 
real  article.  Intuition  is  what  tempts  the  setter  pup 
to  point  at  the  parrot  cage.  Intuition  is  what  leads 
many  business  men  into  the  embrace  of  the  receiver. 

In  his  book,  “  The  Friendly  Arctic,”  Stefansson 
makes  this  significant  remark: 


132 


BUSINESS  FUNDAMENTALS 


When  I  am  lost  in  a  storm,  or  when  I  am  in  doubt  of 
any  kind  I  frequently  find  that  my  feelings,  or  so-called 
“  instincts,”  are  in  conflict  with  deliberate  reason,  and  I 
have  invariably  found  that  the  “  instincts  ”  are  unreliable.  I 
may  have  the  strongest  feeling,  which  almost  amounts  to 
a  conviction,  that  my  camp  lies  in  a  certain  direction,  for 
example,  when  a  careful  review  of  circumstances  shows 
that  it  really  ought  to  lie  in  another. 

If  “  hunch  ”  is  a  treacherous  guide  in  polar  ex¬ 
ploration  it  is  even  more  so  in  dealing  with  the 
complex  problems  of  business. 

Those  who  realize  the  need  for  definite  data  as 
the  footings  of  success  usually  turn  first  to  popula¬ 
tion  statistics.  Population  statistics  are  always  better 
than  nothing.  But  they  have  certain  radical  de¬ 
fects  ;  they  are  always  out-of-date.  During  the  war 
boom,  when  you  wanted  to  know  the  population  of 
Bridgeport  the  latest  figures  were  for  1910  —  four 
years  before  the  war  started.  If  later  you  wanted 
to  find  out  whether  Bridgeport  lost  population  when 
the  boom  subsided,  the  latest  figures  were  for  1920 
—  near  the  peak  of  the  boom. 

Another  weakness  in  population  figures  is  their 
arbitrary  character.  Rarely  do  the  political  boun¬ 
daries  of  a  city  coincide  with  its  true  economic  or 
business  boundaries.  Take  Boston,  for  example. 
Politically,  Boston  includes  Roxbury  but  not  Brook¬ 
line,  Dorchester  but  not  Newton,  Charlestown  but 
not  Chelsea.  Or  compare  San  Francisco  with  Los 
Angeles.  The  political  boundaries  of  San  Francisco 


SELLING  A  CITY 


133 

are  narrowly  drawn  and  its  population  is  proportion¬ 
ately  small.  But  the  political  boundaries  of  Los 
Angeles  are  widely  drawn  and  its  population  is  pro¬ 
portionately  large.  You  will  appreciate  the  absurd¬ 
ity  of  accepting  population  figures  as  a  measure  of 
a  city’s  business  magnitude,  by  noting  the  following 
fact:  For  most  of  the  leading  cities  the  business 
area  or  trading  area  has  a  population  anywhere  from 
2  to  100  per  cent,  greater  than  the  population  of 
the  city  proper,  or  the  political  area. 

Assume,  however,  that  you  have  obtained  cor¬ 
rected  or  true  population  figures.  You  are  still  far 
from  a  measurement  of  the  locality’s  real  purchas¬ 
ing  power.  Purchasing  power  cannot  be  judged  by 
population  alone.  To  the  census  enumerator,  all 
people  look  alike.  He  makes  his  count  upon  the 
principle  so  well  expressed  by  Robert  Burns  in  his 
famous  line  — 

iC  A  man’s  a  man  for  a’  that.” 

The  successful  seller  of  merchandise  cannot  fol¬ 
low  so  poetical  a  vision.  A  man  may  be  a  man  and 
still  not  be  a  prospective  customer.  The  decisive 
factor  is  purchasing  power.  A  man  who  is  spending 
$2  offers  double  the  market  offered  by  the  man  who 
is  spending  $1.  In  a  business  sense ,  the  important 
thing  is  not  people  but  pocketbooks . 

We  now  come  to  the  central  problem  of  all  dis¬ 
tribution;  namely,  the  forecast  of  purchasing  power. 


134  BUSINESS  FUNDAMENTALS 

The  statistical  highways  and  byways  are  strewn  with* 
wrecks  of  formulas  which  have  been  devised  for 
the  appraisal  of  purchasing  power.  Such  a  formula 
is  as  easy  as  rolling  off  a  log  —  and  has  about  as 
much  commercial  value.  You  start  with  population, 
then  you  deduct  negro  population  —  forget  the  fact 
that  when  a  negro  is  in  funds,  as  thousands  of  them 
are  in  a  period  of  high-priced  cotton,  he  is  one  of 
the  most  generous  customers  known  to  scientific 
merchandising.  However,  a  sordid  and  mercenary 
point  of  this  kind  is  distasteful  to  the  formula 
hound.  Something  must  be  done  with  the  negro; 
so  deduct  him.  Some  authorities  favor  deducting 
also  whites  of  foreign  or  mixed  parentage  between 
assigned  age  limits  or  resident  in  specified  localities. 
By  this  time  the  formula  hound  is  really  warmed 
up  and  hitting  on  all  twelve  cylinders.  He  squares 
the  number  of  radio  outfits  located  in  the  city,  ex¬ 
tracts  the  cube  root  of  local  a  hooch  ”  mills  —  of 
foreign  or  mixed  parentage  —  divides  the  quotient 
by  the  remainder  plus  three  times  the  mayor’s 
salary. 

Now  all  this  statistical  “  jazz  ”  is  great  stuff  to 
show  the  visiting  delegates  to  the  annual  convention 
of  mouth  organ  manufacturers,  but  for  real  service 
it  doesn’t  mean  much.  From  a  business  standpoint 
any  measurement  of  a  city’s  sales  possibilities  must 
answer  two  tests:  (i)  it  must  be  simple;  (2)  it  must 
be  up-to-date,  preferably  more  than  up-to-date — • 
a  forecast. 


SELLING  A  CITY 


135 


Simplicity  and  prophecy,  these  are  the  cardinal 
virtues  of  any  attempt  to  appraise  a  city’s  capacity 
as  a  market  for  your  products.  The  problem  has 
never  been  stated  more  succinctly  than  in  the  fol¬ 
lowing  letter  in  which  an  automobile  manufacturer 
lays  down  the  A  B  C  of  territorial  appraisal: 

I  want  to  get  a  more  practical  method  of  sizing  up  a 
city  than  by  hunch  and  hope.  I  want  to  control  distribu¬ 
tion  by  actual  figures  the  same  as  I  control  production. 
Now  if  these  figures  are  to  be  of  real  service  to  us  they 
must  meet  certain  specifications.  Here  are  the  specifi¬ 
cations: 

The  figures  must  be  real  rather  than  some  theoretical 
abstraction;  we  want  actual,  specific,  and  concrete  data  that 
our  men  can  understand. 

The  figures  must  be  more  than  historical.  We  want, 
not  only  a  record  of  the  past,  but  also  a  guide  to  the  future. 

At  the  outset  of  this  discussion  it  was  noted  that 
any  measurement  of  a  territory’s  business  activity 
or  purchasing  power  must  be  capable  of  extension 
into  the  future.  This  is  manifestly  the  crucial  point 
of  the  entire  program.  It  is  the  outlook  rather  than 
the  situation  which  interests  the  business  man.  The 
historian  is  interested  in  the  past,  the  newspaper  is 
interested  in  the  present,  but  the  business  man  is 
interested  in  the  future.  For  example,  in  such  a 
time  as  the  early  part  of  1920,  New  England  was 
booming  —  no  question  about  it.  cc  Present  condi¬ 
tions  ”  really  were  excellent.  Business  men  who  re¬ 
garded  only  present  conditions,  made  heavy  com- 


I36  BUSINESS  FUNDAMENTALS 

mitments  based  thereon.  But  business  men  who  re¬ 
garded  the  future  saw  trouble  ahead  and  put  their 
houses  in  order. 

Again,  in  the  latter  part  of  the  same  year,  when 
the  slump  in  the  Northeast  had  created  a  general 
attitude  of  gloom  and  apprehension,  many  business 
men  thought  that  the  Pacific  Coast  was  destined  for 
immediate  reaction.  Those  who  specialized  on  the 
future,  however,  were  not  pessimistic  because  they 
knew  that  the  Pacific  Coast  is  slow  to  participate  in 
a  depression  just  as  it  is  slow  to  participate  in  pros¬ 
perity.  It  is  one  of  those  sections  which  “  lag,” 
using  this  word  in  a  technical  sense.  Scores  of 
illustrations  could  be  cited  to  show  that  a  city’s  pres¬ 
ent  status  gives  no  clue  to  what  local  policies  should 
be  followed.  These  are  indicated  only  by  a  forecast. 

Attempting  to  forecast  the  short  swings  of  the 
stock  market  —  the  day-to-day  or  week-to-week 
movements  —  is  rank  speculation.  Reputable  eco¬ 
nomists  and  statisticians  do  not  countenance  such 
forecasts.  The  same  applies  to  gambling  in  the  cot¬ 
ton  and  grain  markets,  a  common  practice  in  some 
localities.  Buying1  securities  or  commodities  for 
actual  needs,  however,  is  perfectly  legitimate.  So 
also  is  the  process  of  hedging  used  by  millers  and 
others  to  insure'  a  definite  margin  of  profit  on  orders 
for  future  delivery.  Forecasting  the  business  activ¬ 
ity  that  will  prevail  in  a  city  in  a  given  period  60  to 
90  days  in  the  future,  is  likewise  both  legitimate 
and  necessary. 


SELLING  A  CITY 


137 

Such  a  forecast  is  exactly  what  all  successful  ex¬ 
ecutives  should  make  in  order  to  determine  what 
shall  be  the  output  for  the  year,  to  schedule  pro¬ 
duction,  to  take  advantage  of  long-range  buying,  to 
stabilize  labor  forces,  to  facilitate  financial  plans, 
and  to  make  selling  and  advertising  plans.  A  dis¬ 
tributor  is  necessarily  forced  to  set  some  sort  of 
quota.  This  quota  should  be  an  index  of  the  terri¬ 
tory’s  real  possibilities  and  not  an  arbitrary  measure 
of  past  performance.  A  forecast  of  this  kind  is  a 
necessary  and  legitimate  business  risk. 

For  several  years  the  more  alert  and  far-sighted 
executives  have  been  keenly  interested  in  picking 
localities  which  have  the  most  favorable  outlook.  In 
a  general  way  these  executives  have  been  able  to 
foresee  the  trend  of  business  in  their  various  terri¬ 
tories.  Recently,  however,  there  have  been  devel¬ 
oped  more  definite  methods,  and  fairly  precise  fore¬ 
casts  of  local  business  conditions  can  be  made  several 
months  in  advance.  It  seems  at  first  thought  a  most 
difficult  undertaking,  but  the  same  could  have  been 
said  of  any  other  step  in  science.  Moreover,  with 
a  growing  fund  of  data  on  leading  cities  the  well- 
organized  statistical  department  should  be  in  a  better 
position  to  make  these  local  forecasts  than  is  the 
general  executive  whose  attention  is  demanded  by 
countless  other  activities. 

In  preparing  such  forecasts  it  is  imperative  to 
make  the  most  thorough  analysis  possible  of  condi¬ 
tions  affecting  the  local  outlook  in  each  city.  Find 


BUSINESS  FUNDAMENTALS 


138 

out  what  has  been  the  trend  of  local  business  during 
recent  years,  during  recent  months,  or  even  during 
the  past  week.  In  other  words,  determine  the  pres¬ 
ent  position  of  the  city  in  the  economic  trend. 

From  studies  extended  back  over  a  period  of 
years,  you  can  ascertain  what  the  normal  seasonal 
tendencies  of  business  are  in  each  city  from  month 
to  month.  Finally  you  can  list  the  basic  industries 
or  factors  that  determine  the  prosperity  or  purchas¬ 
ing  power  of  the  city,  and  the  relative  order  of  their 
importance.  It  is  a  question  of  foreseeing  the 
future  of  the  raw  materials  and  manufactured  prod¬ 
ucts  upon  which  local  prosperity  depends  —  modi¬ 
fied  by  seasonal  and  secular  trends. 

Charts  “  A  ”  and  “  B  ”  suggest  some  of  the  ma¬ 
terial  used  in  making  a  forecast  for  the  city  of 
Atlanta. 

Chart  €C  A  99  shows  the  movement  of  business  in 
Atlanta  during  the  post-war  boom,  the  subsequent 
reaction,  and  the  later  trend.  The  study  of  the 
sales  figures  of  a  large  number  of  organizations  as 
well  as  the  official  figures  of  retail  and  wholesale 
trade  indicate  that  this  chart  is  an  extremely  pre¬ 
cise  indicator. 

Chart  “  B  99  shows  the  increase  or  decline  in  busi¬ 
ness  that  should  take  place  from  one  month  to  the 
next  in  an  average  year.  This  chart  of  seasonal 
tendencies  is  made  from  a  study  of  figures  covering 
a  period  of  ten  years.  (Practically  no  change  is 
made  in  such  a  chart  by  taking  a  twenty-year  period 


SELLING  A  CITY 


139 


MONTHLY  VOLUME  OP  BUSINESS 
IN 

Soale  ATLANTA.  G  A. 


instead  of  a  ten-year  period.) 

Here  are  the  factors  determining  the  purchasing 
power  of  Atlanta:  cotton  goods,  30  per  cent,  of  all 


140 


BUSINESS  FUNDAMENTALS 


manufactured  products  5  cottonseed  products,  6  per 
cent.  ;  fertilizer,  5  per  cent.  5  printing  and  publish¬ 


ing*  3  Per  cent. ;  clothing,  3  per  cent.;  all  other 
industries,  53  per  cent.;  cotton,  41  per  cent,  of  all 
crops;  corn,  31  per  cent.;  hay,  6  per  cent.;  all  other 


SELLING  A  CITY 


141 

crops,  22  per  cent.  Next  in  importance  are  mining 
and  quarrying,  and  lumbering  in  nearby  territory. 
The  above  lists  indicates  that  local  industries  are 
somewhat  more  important  than  agriculture.  Of  the 
industries,  cotton  manufacturing  is  far  in  the  lead 
and  is  the  one  that  should  receive  the  greatest  con¬ 
sideration.  Of  the  crops,  cotton  and  corn  are  the 
only  ones  we  need  consider. 

In  using  these  charts  to  make  a  forecast,  u  A  ” 
would  be  brought  up  to  date  and  projected  two 
months  into  the  future,  according  to  the  seasonal 
tendencies  brought  out  by  Chart  “  B.”  In  an  aver¬ 
age  year  this  is  the  path  that  business  would  follow, 
and  if  this  line  alone  were  used  to  make  a  forecast, 
the  results,  would  not  often  be  far  astray.  In  actual 
practice,  however,  it  is  best  to  change  the  slope  of 
this  line  according  as  the  average  outlook  for  local 
raw  materials  and  finished  products  is  for  a  seasonal 
movement  more  or  less  pronounced  than  usual.  If, 
for  example,  the  seasonal  tendency  is  upward  during 
the  period  under  consideration  but  the  readjustment 
process  is  just  gathering  momentum,  the  projected 
line  would  be  inclined  less  sharply  or  might  even 
be  bent  forward.  This,  of  course,  depends  upon 
the  city  and  the  position  of  its  industries. 

In  a  city  like  New  York,  movements  are  very 
gradual  and  even  a  general  period  of  readjustment 
does  not  result  in  a  radical  change  in  the  trend  of 
the  business  line.  On  the  other  hand,  a  city  that 
is  closely  associated  with  agriculture,  usually  has 


142 


BUSINESS  FUNDAMENTALS 


very  pronounced  seasonal  movements.  In  the  latter 
case,  forecasts  made  when  the  influence  of  the  busi¬ 
ness  is  depressing  the  price  of  farm  products  should 
allow  for  only  a  minor  “  seasonal  rise.” 

The  situation  differs  for  each  city  under  consid¬ 
eration  and  a  record  of  what  has  taken  place  in  the 
past  is  absolutely  essential.  Of  course,  such  a  record 
is  not  completely  comprehensive ;  neither  is  the 
forecast  infallible.  It  has  been  abundantly  dem¬ 
onstrated,  however,  that  off-hand  estimates  wThich 
do  not  take  into  consideration  the  position  of  a  city 
in  the  economic  cycle,  seasonal  tendencies,  and  the 
outlook  for  basic  industries,  may  carry  one  far 
astray. 

The  proof  of  the  pudding  is  in  the  eating.  Chart 
<c  C  ”  shoiws  in  bull’s-eye  form  the  results  of  an 
actual  forecast  for  the  month  of  November  in  a 
given  year.  This  forecast  was  made  60  days  in 
advance,  early  in  September,  and  124  cities  were 
checked.  The  actual  November  statistics  showed 
that  44  per  cent,  of  the  estimates  came  within  5 
points;  74  per  cent.,  within  10  points;  and  87  per 
cent.,  within  15  points.  This  particular  forecast  was 
selected  at  random.  In  some  months,  the  results 
have  been  slightly  less  favorable;  in  other  months, 
considerably  more  favorable. 

A  convenient  form  for  arranging  such  a  forecast 
is  as  follows: 


SELLING  A  CITY 


143 


BABSON  BULL'S-EYES 


rofi 


-NDVEmEBjaZZ. 


O Forecast  Low 
%  Forecast  High 
@ Forecast  Exact 


126  C mss  Checked 
63%  within  SpO/nts 

|l_  1 ' '  '  '  '  '  . .  '  ’  "1  Tfi  •*  »  10  * 

Territories  Department  1  07.-  ••  /s  * 


4 


144  BUSINESS  FUNDAMENTALS 


Forecast  of  Business  —  August  of  Current  Year 
P re fared  June  I  (Comparisons  in  percentage  with  a 
year  ago ,  i.e.  last  August ,  equals  ioo). 


New  England 

District  ....  110% 

Boston,  Mass . 130 

Fall  River,  Mass.  lM  115 
Hartford,  Conn.  ..  no 
Holyoke,  Mass.  .  .  ..  120 

Lowell,  Mass . 100 

Lynn,  Mass.  .....  120 
Manchester,  N.  H.  95 
New  Bedford,  Mass.  100 
New  Haven,  Conn,  no 
Portland,  Me.  ...  115 
Providence,  R.  I.  .  .  105 
Springfield,  Mass.  .  no 
Waterbury,  Conn.  .  125 
Worcester,  Mass.  .  .  115 
New  York  District  .  120 
Albany,  N.  Y.  ...  130 
Bridgeport,  Conn.  120 
Buffalo,  N.  Y.  .  ..,  115 
New  York,  N.  Y. _  125 
Rochester,  N.  Y.  ....  no 
Syracuse,  N.  Y.  .  .  .  120 


Pennsylvania 

District  .  100 

Altoona,  Pa.  ......  95 


Camden,  N.  J.  ...  no 
Harrisburg,  Pa.  ...  120 
Philadelphia,  Pa.  .  .  no 
Reading,  Pa .  1 00 


Scranton,  Pa .  85% 

Trenton,  N.  J.  ...  105 
Wilkes-Barre,  Pa.  .  90 

Wilmington,  Del.  .  105 
Ohio  District  115 

Akron,  Ohio  ....  105 
Canton,  Ohio  ....  105 
Cincinnati,  Ohio  ..  115 
Cleveland,  Ohio  .  .  125 
Columbus^  Ohio  .  .  120 
Dayton,  Ohio  ,.  .  .  .  105 

Erie,  Pa .  no 

Pittsburgh,  Pa.  ...  no 
Toledo,  Ohio  ....  130 
Youngstown,  Ohio  1 20 
Virginia  District  no 
Baltimore,  Md.  ...  95 

Charleston,  S.C.  ..  no 
Charlotte,  N.C.  .  .  120 
Huntington,  W.  Va.  100 

Norfolk,  Va . no 

Richmond,  Va.  ...  105 
Washington,  D.C.  .  1 15 
Winston-Salem,  N.C.  115 
Georgia  District  iio 

Atlanta,  Ga .  105 

Birmingham,  Ala.  .  135 
Chattanooga,  Tenn.  IOO 
Jacksonville,  Fla.  .  no 
Knoxville,,  Tenn.  105 


SELLING  A  CITY 


Memphis,  Tenn. 

120%  ‘ 

Mobile,  Ala . 

1 10 

Nashville,  Tenn.  .  . 

120 

New  Orleans,  La.  k.. 

1 10 

Savannah,  Ga . 

100 

Illinois  District 

1 10 

Chicago,  Ill.  .  .....  . 

1 IO 

Davenport,  la.  ..... 

120 

Des  Moines,  la.  .  . 

IOO 

Detroit,  Mich.  .  .  ., 

115 

Fort  Wayne,  Ind.  ... 

IIO 

Grand  Rapids,  Mich. 

115 

Indianapolis,  Ind.  ,.4 

IIO 

Kalamazoo,  Mich.  . 

IIO 

Milwaukee,  Wis. 

105 

Oshkosh,  Wis.  .  .,. 

IOO 

Peoria,  Ill . 

IIO 

Sioux  City,  la.  .  .  . 

IIO 

South  Bend,  Ind. 

125 

Springfield,  Ill.  .  .... 

105 

Missouri  District 

115 

Evansville,  Ind.  .  . 

115 

Little  Rock,  Ark.  . 

IOO 

Louisville,  Ky.  .  .  . 

125 

Memphis,  Tenn.  .  . 

120 

St.  Louis,  Mo . . 

IIO 

Northwest  District 

IOO 

Aberdeen,  S.D.  .... 

115 

Billings,  Mont.  .  .  . 

105 

Duluth,  Minn.  r.,.  . 

95 

Fargo,  N.D . 

95 

Great  Falls,  Mont. 

95 

Minneapolis,  Minn. 

IOO 

St.  Paul,  Minn.  .  . 

IOO 

145 

Sioux  Falls,  S.D.  .  .  90% 

Kansas  District  105 

Cheyenne,  Wyo.  .  .  95 

Denver,  Colo . 105 

Joplin,  Mo .  150 

Kansas  City,  Mo.  .  95 


Oklahoma  City,Okla.  no 


Omaha,  Neb .  105 

Pueblo,  Colo .  85 

St.  Joseph,  Mo.  .  .  85 

Topeka,  Kans . 105 

Tulsa,  Okla.  .....  130 

Wichita,  Kan .  90 

Texas  District  iio 

Dallas,  Tex.  .....  120 

El  Paso,  Tex . no 

Fort  Worth,  Tex.  .  no 
Houston,  Tex.  ....  no 
San  Antonio,  Tex.  .  95 

Pacific  District  no 


Boise,  Ida .  115 

Los  Angeles,  Cal.  .  no 
Phoenix,  Ariz.  ...  105 

Portland,  Ore .  95 

Sacramento,  Cal.  .  .  115 
Salt  Lake  City,  Utah  105 
San  Francisco,  Cal.  no 

Seattle,  Wash . no 

Spokane,  Wash.  .  .  105 
Tacoma,  Wash . no 


United  States 

Average  =  110% 


146 


BUSINESS  FUNDAMENTALS 


The  usefulness  of  such  forecasts  to  national  and 
regional  distributors  is  obvious.  But  with  the  con¬ 
tinued  application  of  the  scientific  approach  to  busi¬ 
ness  problems,,  it  is  possible  that  a  local  forecast  will 
be  of  even  greater  utility  to  the  retailer.  If  you  are 
a  retailer  you  should  have  each  month  a  forecast 
(sixty  days  in  advance)  of  the  business  activity  of 
your  city.  For  example,  in  June,  forecast  August 
business.  A  figure  of  no  per  cent.,  say,  indicates 
that  in  August  your  city’s  business  will  be  10  per 
cent,  better  than  in  August  of  last  year.  A  figure 
of  95  per  cent,  means  that  in  August  your  city’s 
business  will  be  5  per  cent,  less  than  in  August  of 
last  year.  In  each  case  August  of  last  year  is  taken 
as  the  base,  or  100.  The  forecast  refers  to  business 
as  expressed  in  terms  of  dollars  rather  than  physical 
units. 

Estimate  the  coming  demand.  Knowing  what 
your  sales  were  in  August  of  last  year,  and  multi¬ 
plying  this  figure  by  the  percentage  forecast  for 
your  city,  you  can  readily  get  a  close  estimate  of 
what  your  sales  should  be  this  coming  August. 
Actual  records  show  that  an  improvement  in  general 
business  conditions  is  followed  by  a  corresponding 
increase  in  retail  sales,  and  a  general  decline  is  fol¬ 
lowed  by  a  decline  in  retailing.  Having  estimated 
in  this  way  your  volume  of  August  sales,  you  can 
gauge  your  stocks  of  merchandise  so  that  you  can 
take  advantage  of  the  demand.  At  the  same  time 
you  avoid  the  danger  of  having  a  great  quantity  of 


SELLING  A  CITY 


HI 

unsold  goods  left  on  your  hands. 

Aid  your  financing.  In  some  instances  you'  may 
wish  to  borrow  at  your  bank  to  finance  purchases  of 
merchandise.  The  forecast  for  your  city  should  be 
of  distinct  value  in  this  connection.  When  a  con¬ 
siderable  improvement  in  business  is  indicated,  this 
favorable  outlook  should  be  brought  to  the  attention 
of  your  banker,  just  as  you  would  show  him  your 
statement.  Moreover,  from  your  own  standpoint, 
you  want  your  loans  to  be  accurately  adjusted  to  the 
business  outlook.  It  is  no  advantage  to  a  merchant 
to  burden  himself  with  heavier  obligations  than 
sales  prospects  warrant.  On  the  other  hand,  he 
desires  sufficient  credit  to  avail  himself  of  any  im¬ 
provement  in  sight.  The  amount  of  accommoda¬ 
tion  most  advantageous  depends  upon  the  amount 
of  prosperity  ahead  —  and  this  is  measured  by  the 
forecast  figure.  Bank  and  borrower  alike  have  a 
common  interest  in  correctly  ascertaining  the  trend, 
and  an  accurate  local  forecast  is  for  the  benefit  of 
both. 

Handle  your  employment  problem  with  an  eye 
to  the  future.  No  merchant  cares  to  have  an  over¬ 
supply  of  sales  people  and  clerical  workers.  Nor 
does  he  want  to  incur  the  ill  will  of  customers  by 
failing  to  give  adequate  service.  The  whole  em¬ 
ployment  problem,  therefore,  makes  it  necessary  to 
predetermine  the  demand.  If  August  is  going  to 
find  your  store  thronged  with  customers,  you  will 
need  a  larger  staff  than  you  would  were  trade  to 


148  BUSINESS  FUNDAMENTALS 

be  moderate.  A  correct  forecast  will  help  you  in 
laying  out  your  personal  requirements  sixty  days 
in  advance. 

Look  ahead  when  shaping  advertising  policy. 
Judging  by  statistics  of  local  newspaper  advertising, 
most  stores  prefer  to  advertise  more  liberally  when 
the  trend  is  upward.  There  is  room  for  argument 
on  this  point,  but  assuming  that  a  merchant  wants 
to  enlarge  his  publicity  of  all  kinds  if  business  is  due 
for  expansion,  a  local  forecast  figure  gives  him  a 
dependable  compass.  Moreover,  an  accurate  antici¬ 
pation  of  conditions  will  aid  in  deciding  not  only 
the  amount  of  the  advertising  appropriation  but  also 
the  character  of  the  advertising  appeal.  When  bus¬ 
iness  is  on  the  upgrade  the  public  readily  respond 
to  arguments  which  fallj  flat  during  the  stress  of 
hard  times. 

Merchandise  to  meet  the  times.  Of  course  this 
same  principle  of  writing  advertising  to  fit  condi¬ 
tions  applies  also  to  other  parts  of  merchandising. 
The  selection  of  goods,  the  education  of  sales  peo¬ 
ple,  window  dressing,  counter  displays  —  every  side 
of  the  business  depends  on  meeting  the  public  mood. 
Practices  which  were  eminently  successful  during  the 
boom  were  disastrous  during  the  ensuing  depression, 
and  a  further  revision  will  be  necessary  to  capitalize 
the  approaching  revival. 

To  forecast  business  conditions  is  to  forecast  the 
needs  and  desires  of  the  public ;  and  to  forecast  and 
adequately  meet  these  public  needs  and  desires  is 


SELLING  A  CITY 


149 

to  succeed  in  retailing.  Public  needs  and  desires  act 
in  accordance  with  economic  law.  The  law  of  action 
and  reaction  determines  what  the  public  will  need 
and  desire  in  the  months  to  come.  A  correct  knowl¬ 
edge  of  present  conditions  and  the  application  of  the 
law  is  essential  to  successful  merchandising. 


Chapter  XI 

SELLING  AN  INDUSTRY 


ERY  few  sales  organizations  reach,  either  in 


V  their  advertising  or  selling  activities,  all  the 
people  or  business  concerns  that  are  logical  sales 
prospects.  Moreover,  only  the  most  up-to-date  and 
well-managed  concerns  keep  informed  regarding 
changes  in  the  condition  of  their  customers5  busi¬ 
nesses.  Alert  sales  managers  are  to-day  eagerly  de¬ 
veloping  important  lines  of  market  information  that 
have  heretofore  been  given  but  scant  consideration. 

There  are  various  ways  of  selling  open  to  sales 
organizations.  Some  concerns  handling  a  product 
which  is  judged  to  have  a  nation-wide  market 
broadcast  advertising  matter  all  over  the  country. 
This  advertising  is  placed  in  newspapers  and  period¬ 
icals  of  all  kinds  in  the  hope  that  it  will  reach  the 
eye  of  a  prospective  purchaser.  This,  of  course,  is 
more  or  less  of  a  blind  way  of  going  at  the  prop¬ 
osition.  Unless  the  concern  is  so  fortunate  as  to 
have  hit  upon  a  particularly  prosperous  time 
throughout  the  country,  such  methods  of  selling  are 
bound  to  be  costly. 

As  pointed  out  in  Chapter  X,  many  concerns  en¬ 
deavor  to  direct  their  selling  efforts  toward  selected 


SELLING  AN  INDUSTRY  151 

cities,  towns,  or  other  geographical  divisions.  The 
idea  is  to  pick  out  those  sections  where  business  is 
best  and  concentrate  advertising  and  selling  activ¬ 
ities  on  them.  This  method  is  much  better  than  the 
one  mentioned  above.  By  ignoring  localities  where 
purchasing  power  is  small  or  temporarily  below  nor¬ 
mal,  both  time  and  money  are  saved. 

The  concerns  that  are  most  successful  are  those 
that  know  the  most  about  their  prospective  cus¬ 
tomers. 

These  concerns  not  only  ascertain  certain  kinds  of 
people  or  business  firms  that  constitute  their  market, 
but  they  also  keep  in  touch  with  the  condition  of 
each  customer’s  business.  They  know  how  big  a 
buyer  they  are  catering  to  j  they  know  when  his  busi¬ 
ness  is  active  and  when  it  is  dull  5  and  they  know 
when  his  purchasing  power  is  high  and  when  it  is 
poor.  In,  other  words,  they  have  a  finger  on  the 
pulse  of  their  market  at  all  times.  The  selling  ex¬ 
pense  of  such  organization  is  very  low  compared 
to  others. 

If  you  are  one  of  those  who  have  made  no  special 
study  of  your  market  but  have  been  working  along 
on  a  basis  of  experience  and  tradition,  you  are  not 
making  the  most  of  your  opportunities.  If  you 
have  been  confining  your  campaign  studies  to  the 
selection  of  prosperous  localities  only,  you  are  even 
then  not  making  the  most  of  your  opportunities. 
You  are  still  laboring  under  needless  risks,  worries, 
and  losses. 


152  BUSINESS  FUNDAMENTALS 

Regardless  o£  whether  you  are  a  wholesale  dis¬ 
tributor  in  many  localities,  or  a  retailer  doing  busi¬ 
ness  in  only  one  locality,  you  can  increase  your  sales 
and  reduce  your  selling  expense  substantially  by 
directing  your  advertising  and  sales  forces  to  meet 
changing  conditions  in  the  industries  to  which  you 
desire  to  sell  or  which  employ  your  customers. 

If  your  product  is  classed  as  equipment,  machin¬ 
ery,  supplies,  or  services  of  interest  only  to  a  certain 
class  or  group  of  industries,  information  as  to  the 
present  condition  and  future  outlook  for  those  in¬ 
dustries  should  be  in  hand  before  you  spend  a  single 
dollar  or  send  out  a  single  salesman  in  an  effort  to 
market  your  product.  If  your  line  is  highly  spec¬ 
ialized,  cotton  machinery  for  instance,  you  must 
sell  to  a  single  industry  and  your  sales  and  adver¬ 
tising  campaigns  should  be  undertaken  only  after 
securing  the  latest  information  and  forecasts  of  the 
cotton  goods  industry. 

If  your  product  is  one  that  can  be  sold  to  several 
different  lines,  office  furniture  or  electrical  equip¬ 
ment,  for  example,  you  will  find  that  a  campaign 
laid  out  and  directed  to  each  industry  individually 
will  lower  your  cost  of  distribution  substantially. 
You  have  an  opportunity  to  cut  your  sales  expenses 
from  io  to  30  per  cent.,  and  if  you  happen  to  be 
in  a  mail  order  field  you  can  cut  even  more. 

If,  instead  of  being  a  wholesaler  you  are  a  re¬ 
tailer  whose  market  is  limited  to  a  given  city,  you 
also  can  profit  by  a  knowledge  of  what  is  going  on 


SELLING  AN  INDUSTRY 


153 

in  the  various  industries,  of  what  their  rate  of  pro¬ 
ducing  activity  is,  and  of  whether  or  not  they  are 
prosperous  and  employing  normal  amounts  of 
labor.  A  retailer  can  put  such  information  to  a 
very  practical  use.  It  is  true  that  thousands  of 
retailers  do  not  know  the  lines  of  business  in  which 
their  customers  are  engaged.  Nevertheless,  you  can 
ascertain  easily  the  kind  of  industries  that  are  em¬ 
ploying  people  in  your  city  or  town,  and  by  study¬ 
ing  present  conditions  and  the  future  outlook  for 
these  industries,  you  can  decide  which  classes  of 
your  possible  customers  are  now  the  most  prosperous 
and  which  are  going  to  be. 

Always  in  every  city,  some  one  or  more  industries 
are  prosperous.  The  merchant  who  studies  business 
fundamentals  will  make  his  business  immensely 
more  profitable  by  directing  his  sales  drives  toward 
the  people  engaged  in  those  lines. 

Cater  to  these  classes  by  directing  your  advertising 
in  the  local  papers  towards  them  and  by  stocking  up 
with  goods  that  that  class  of  people  are  in  the  habit 
of  calling  for.  In  this  way,  you  will  be  conducting 
your  business  along  the  lines  of  least  resistance,  and 
will,  without  question,  increase  your  sales  and  ob¬ 
tain  a  quicker  turnover  on  your  stock.  Up-to-date 
retail  sales  managers  have  increased  their  sales  very 
markedly  by  directing  their  advertising  in  this 
manner  and  by  catering  especially  and  directly  to 
people  engaged  in  industries  that  were  known  to  be 
prosperous. 


154  BUSINESS  FUNDAMENTALS 

Retailers  of  any  article  or  line  of  goods,  bond 
salesmen,  insurance  and  real  estate  men,  will  all  find 
increased  profits  by  directing  their  selling  activities 
toward  the  people  who  have  the  cash  to  buy. 

Wholesaler  or  retailer ,  when  your  sales  efforts  are 
based  on  a  statistical  knowledge  of  your  customer’s 
business ,  when  all  wasted  effort  is  eliminated  by  di¬ 
recting  your  energies  straight  to  the  concern  or  indi¬ 
vidual  with  the  buying  fowery  then  you  are  selling 
scientifically . 

If  you  are  selling  some  product  to  only  one  or  a 
few  industries,  it  may  be  well  for  you  to  consider 
whether  or  not  you  are  selling  to  all  of  the  indus¬ 
tries  that  could  use  your  product.  To  those  who 
desire  to  broaden  their  sales  field,  an  analysis  of 
the  industrial  market  will  reveal  rich  possibilities. 

Strange  as  it  may  seem,  sellers  do  not  realize  all 
of  the  ways  in  which  their  product  can  be  used.  We 
have  many  times  been  informed  by  some  manu¬ 
facturer  or  salesman  in  a  rather  humorous  vein  that 
so-and-so  u  has  discovered  a  new  use  for  my  prod¬ 
uct.”  With  changing  conditions  in  the  various  in¬ 
dustries  whereby  new  processes  are  replacing  old, 
new  products  being  tried  out,  etc.,  it  behooves  the 
manufacturer  of  any  product  to  keep  a  watchful 
eye  on  the  developments  in  the  entire  industrial 
layout. 

There  are  over  340  important  industries  in  the 
country.  These  industries  comprise  over  290,000 
establishments  employing  over  9,000,000  wage 


SELLING  AN  INDUSTRY 


155 


earners.  From  the  abrasive  industry  at  the  alpha¬ 
betical  top  of  the  list  to  , woven  goods  at  the  bottom, 
there  is  embraced  every  kind  of  business  activity. 
These  290,000  manufacturing  establishments  buy 
over  $37,000,000,000  of  goods  each  year.  They 
purchase  raw  materials,  equipment,  and  supplies  of 
every  conceivable  kind. 

The  following  table  shows  how  the  annual  pur¬ 
chases  of  the  various  major  groups  of  industries 
compare  with  each  other: 


Annual  Purchases  of  All  Industries 


Industry 


Amount  of  'purchases 


Food  and  kindred  products  ......  $10,111,546,824 


Textiles  and  their  products .  5)382,079,303 

Iron  and  steel  and  their  products  .  .  4,815,885,004 

Chemicals  and  allied  products  .  .  .  3,747,674,883 

Vehicles  for  land  transportation  t.  .  2,498,225,514 

Metals  and  metal  products,  other 

than  iron  and  steel  .  1,910,034,606 

Leather  and  its  finished  products  .  .  1,713,807,336 

Lumber  and  its  remanufactures  .  .  .  1)359)998,567 

Paper  and  printing  .  I)3°6)7i7>793 

Railroad  repair  shops .  547,828,694 

Tobacco  manufactures  .  48  3, 5 67,7  5 4 

Stone,  clay  and  glass  products .  408,570,822 

Liquors  and  beverages  . .  .  .  222,776,314 

Miscellaneous  industries . .  .  2,867,666,969 


> 


Total 


$37,376,380,283 


156  BUSINESS  FUNDAMENTALS 

When  examining  the  industrial  market  with  a 
view  to  deciding  upon  a  selling  field,  attention 
should  be  paid  to  two  very  desirable  features  of  a 
market j  namely,  (1)  breadth,  and  (2)  seasonal 
uniformity.  The  broader  the  field,  the  less  likeli¬ 
hood  there  is  of  losses  due  to  the  troubles  that  af¬ 
flict  single  industries  from  time  to  time,  such  as 
overproduction  and  strikes.  The  concern  with  only 
one  customer  is  not  in  so  secure  a  position  as  the 
concern  with  one  hundred,  notwithstanding  that  the 
one  concern  may  be  buying  fully  as  much  as  the 
entire  hundred.  There  is  more  safety  in  a  diversi¬ 
fied  market.  And  the  market  that  holds  up  well 
in  all  seasons  is  obviously  a  more  profitable  one  than 
a  one  or  two-season  market.  In  the  former  case, 
manufacturing  is  done  much  more  efficiently,  both 
producing  and  selling  organizations  are  more  stable, 
and  less  business  risk  is  involved  in  the  handling  of 
inventories. 

The  thing  to  do,  therefore,  is  to  study  the  sea¬ 
sonal  habits  of  the  various  industries  and  determine 
the  time  of  year  in  which  each  usually  encounters 
its  season  of  greatest  manufacturing  activity.  (See 
accompanying  chart.)  By  timing  sales  and  ad¬ 
vertising  campaigns  to  anticipate  manufacturers’ 
seasonal  requirements  for  equipment,  materials,  and 
supplies  in  selected  industries,  it  is  possible  to  main¬ 
tain  a  fairly  uniform  market  throughout  every  sea¬ 
son  of  the  year. 

It  may  be  that  in  order  to  carry  out  this  plan  of 


SELLING  AN 


INDUSTRIES 

AUTOMOBILE.. . 

BOOT  &  SHOE . 

BRICK _ 

CANNING _ 

CEMENT . . 

CLOTHING  (MEN’S). _ 

CONFECTIONERY . . 

COTTON  GOODS _ 

ELECTRICAL  EQUIPMENT ... 

FERTILIZER _ 

FOUNDRY.... _ _ _ 

FUR  GOODS _ 

JEWELRY _ 

PAINT  &  VARNISH. _ 

* 

PAPER _ 

PHONOGRAPH _ 

SILK  GOODS _ 

TIRE _ 

TOY . . . . 

WOOLEN  GOODS _ _ _ _ 


158  BUSINESS  FUNDAMENTALS 

a  year-around  market,  it  will  be  necessary  to  handle 
more  than  one  product.  For  example,  the  seller 
of  wire  screens  required  for  building  purposes 
largely  in  the  spring  and  summer  should  take  on 
some  line  that  is  associated  with  the  heating  and 
ventilating  of  industrial  buildings  £nd  business 
quarters  in  the  winter. 

The  first  step,  then,  in  determining  what  indus¬ 
tries  form  a  possible  market  for  your  product  is  to 
examine  the  activities  of  the  various  industries  in 
the  light  of  the  possible  ways  in  which  your  article 
or  commodity  can  reasonably  be  expected  to  be  used. 
This  will  necessitate  a  clear  understanding  of  the 
merits  of  your  own  product  and  a  knowledge  of  the 
nature  of  the  activity  of  the  various  industries. 

In  order  to  acquire  a  knowledge  of  the  nature 
of  the  activity  of  the  various  industries,  information 
must  be  secured  showing  the  kind  of  products  being 
produced  and  the  layout  of  plant  and  equipment 
used  to  manufacture  and  sell  them.  The  size  of 
the  various  concerns  in  any  industry  should  be  ascer¬ 
tained  and  the  quantities  of  materials,  supplies,  and 
equipment  required  by  each  estimated. 

A  study  of  the  above  kind  will  frequently  reveal 
a  number  of  hitherto  unsuspected  customers  among 
the  industries.  However,  whether  you  sell  to  one 
industry  or  many,  whether  you  sell  direct  to  the 
manufacturer  or  to  his  employees,  you  should  be  in 
possession  of  the  facts  concerning  present  conditions 
and  the  future  outlook  in  each. 


SELLING  AN  INDUSTRY 


159 

Hqw  will  you  go  about  analyzing  the  purchasing 
power  of  your  customers?  Which  ones  will  be  the 
most  active  and  the  readiest  buyers?  Will  all  con¬ 
cerns  in  any  one  industry  be  equally  good  customers? 
How  long  will  the  prosperous  concerns  continue 
active?  All  these  questions  will  arise  constantly. 
You  can  answer  them  by  keeping  in  touch  with  fun¬ 
damental  business  conditions  and  by  watching  the 
special  factors  which  are  peculiar  to  the  various 
individual  industries. 

In  the  first  place,  all  industries  are  influenced  by 
the  varying  phases  of  business.  As  already  stated 
in  a  previous  chapter,  industrial  history  has  always 
consisted  of  distinct  phases  and  although  of  different 
duration,  each  phase  has  consisted  of  four  periods ; 
namely,  (1)  a  period  of  over-expansion,  (2)  a  period 
of  decline,  (3)  a  period  of  depression,  and  (4)  a 
period  of  improvement.  These  periods  follow  one 
another  by  reason  of  the  natural  reaction  of  eco¬ 
nomic  conditions.  The  idea  that  reckless  expansion 
can  ever  become  an  actual  fact  and  not  be  followed 
by  a  business  depression  is  a  fallacy. 

All  that  is  borrowed  must  be  repaid,  and  as  long 
as  business  insists  upon  over-drawing  its  account, 
we  must  expect  the  consequent  reaction. 

In  order  to  study  fundamental  business  condi¬ 
tions,  statistics  regarding  bank  clearings,  business 
failures,  building  permits,  commodity  prices,  pro¬ 
duction  of  basic  raw  materials,  employment,  foreign 
trade,  money  rates,  etc.  must  be  collected  and  corre- 


1 60  BUSINESS  FUNDAMENTALS 

lated.  These  statistics  will  indicate  when  general 
business  is  in  a  prosperous  condition  and  when  it  is 
in  a  depressed  condition.  They  will  also  tell  when 
it  is  time  to  expect  a  long  swing  improvement  in 
business,  and  conversely,  when  to  expect  a  long 
swing  decline. 

It  is  improbable  for  the  manufacturing  activity 
of  all  the  industries  to  vary  exactly  in  unison  with 
general  business  as  indicated  by  statistics  of  funda¬ 
mental  barometers.  Most  industries  either  lag  be¬ 
hind  or  precede  the  general  movement.  Changes 
in  the  business  cycle  do  not  cause  the  same  degree 
of  change  in  the  manufacturing  activity  of  every 
industry.  Special  factors  peculiar  to  each  industry 
are  responsible  for  this  lack  of  complete  uniformity. 

Between  the  turning  point  in  a  period  of  de¬ 
pression  and  the  turning  point  in  a  period  of  pros¬ 
perity,  when  demand  is  improving,  prices  rising 
faster  than  costs,  profits  good,  failures  declining  and 
many  new  concerns  entering  business,  the  manu¬ 
facturing  activity  of  most  industries  is  usually 
strong.  On  the  other  hand,  between  the  turning 
point  in  a  period  of  prosperity  and  the  turning  point 
in  a  period  of  depression,  when  demand  is  declin¬ 
ing,  prices  receding  below  the  cost  of  production, 
losses  mounting,  and  failures  increasing,  most  of 
the  industries  are  forced  to  adopt  a  policy  of  curtail¬ 
ment  and  purchase  very  little.  It  is  very  important, 
therefore,  to  study  and  watch  the  changing  phases 
of  business  independently  of  the  various  conditions 


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BUSINESS  FUNDAMENTALS 


which  are  peculiar  to  any  one  industry. 

Do  not,  however,  ignore  the  special  conditions 
affecting  any  given  industry.  We  must  look  care¬ 
fully  into  the  demand  it  is  receiving  for  its  product, 
both  in  the  domestic  market  and  from  abroad.  We 
must  examine  carefully  statistics  showing  the  way 
in  which  supply  is  changing  due  to  variations  in 
producing  activity,  in  the  rate  of  importation,  and 
in  the  amount  of  stocks  held  for  sale.  We  must 
be  especially  careful  to  study  the  way  in  which  the 
cost  of  production  is  changing  and  the  factors  re¬ 
sponsible  for  such  changes.  The  price  of  the  in¬ 
dustry’s  product  and  the  various  factors  that  will 
tend  either  to  increase  or  decrease  it  must  be  looked 
into.  In  the  case  of  any  particular  concern,  the 
competition  that  concern  is  meeting  with  will  be  a 
factor  in  its  sales.  All  of  these  economic  conditions 
change  frequently  and  bring  about  changes  in  the 
purchasing  activity  of  the  industry. 

We  must  also  consider  certain  other  factors  which 
usually  have  an  influence  on  the  outlook  for  an  in¬ 
dustry,  namely,  the  labor  situation,  the  transpor¬ 
tation  situation,  money  conditions,  the  crops,  the 
tariff,  and  the  trend  of  legislation. 

In  making  a  study  of  the  probable  purchasing 
activity  of  an  industry,  the  particular  thing  we  must 
watch  is  the  way  in  which  the  above  factors  affect 
the  rate  of  manufacturing  in  the  various  establish¬ 
ments.  The  more  active  manufacturing  is,  the  more 
materials,  equipment,  and  supplies  will  be  needed. 


SELLING  AN  INDUSTRY 


163 

Sometimes  a  manufacturing  establishment  will  con¬ 
tinue  to  manufacture  when  profits  are  practically 
zero.  Nevertheless,  even  then  it  will  need  to  buy 
raw  materials  and  supplies  if  it  wishes  to  avoid  shut¬ 
ting  down.  Hence,  the  point  we  have  to  consider  is 
how  to  anticipate  changes  in  manufacturing  activity. 

As  a  preliminary  step,  it  will  be  well  to  obtain 
an  over-all  idea  of  the  industry.  The  first  ques¬ 
tions  that  naturally  arise  have  to  do  with  the  use¬ 
fulness  of  the  industry’s  products  and  the  reasons 
for  the  establishment  of  the  industry  in  its  present 
centers.  The  age  of  the  industry,  and  the  rate  of 
its  past  growth,  also  its  relative  importance  com¬ 
pared  .with  other  industries  should  be  ascertained. 
In  this  connection,  we  should  recognize  and  give 
due  weight  to  the  fact  that  the  permanency  of  the 
industry  will  depend  on  the  continued  usefulness  of 
its  product  and  its  continued  ability  to  combine  the 
necessary  elements  of  production  and  distribution. 
The  usefulness  of  carriages  and  wagons  is  beginning 
to  wane  due  to  the  advent  of  the  automobile.  The 
manufacture  of  wooden  automobile  wheels  is  giving 
way  to  the  manufacture  of  steel  wheels  because  of 
increasing  difficulty  in  obtaining  hickory. 

Let  us  consider  first  how  changes  in  the  demand 
for  your  customer’s  product  will  cause  changes  in 
his  desire  or  ability  to  purchase  the  thing  you  wish 
to  sell  him.  When  his  demand  is  good  and  he  is 
actively  producing,  he  will  buy  raw  materials,  sup¬ 
plies,  and  equipment  of  various  kinds.  Conversely, 


164  BUSINESS  FUNDAMENTALS 

when  his  demand  declines,  he  will  curtail  produc¬ 
tion  and  will  be  less  likely  to  buy.  If  he  happens 
to  be  in  the  jewelry  industry,  for  example,  you 
will  find  that  the  number  of  people  who  desire  to 
buy  jewelry  is  much  greater  during  periods  of  pros¬ 
perity  than  during  periods  of  depression  because 
the  purchasing  power  of  the  public  is  generally 
stronger  when  times  are  good  than  when  times  are 
hard.  In  general,  the  higher  the  price  of  jewelry 
advances,  the  harder  it  will  be  to  sell  it  because 
there  will  be  fewer  people  with  the  necessary  pur¬ 
chasing  power.  Conversely,  the  lower  the  price  of 
jewelry  declines,  the  more  people  there  will  be  in 
a  position  to  buy  it.  Hence,  the  purchasing  activity 
of  any  industry  will,  all  other  things  remaining  con¬ 
stant,  rise  and  fall  with  increases  and  decreases  in 
the  demand  for  its  product. 

Another  important  item  to  inquire  into  is  your 
customer’s  cost  of  production.  Inasmuch  as  the 
cost  of  production  plays  an  important  part  in  de¬ 
termining  the  profits  of  an  industry,  the  various  fac¬ 
tors  entering  into  it  must  be  examined  with  great 
care  in  order  to  determine  whether  total  costs  will 
increase  or  decrease  during  the  period  under  study. 

Prices  also  are  important  for  practically  the  same 
reason,  as  we  have  seen.  Prices  respond  to  changes 
in  basic  business  conditions  differently,  however,  in 
the  case  of  industries  where  free  competition  is  the 
rule  than  they  do  in  the  case  of  industries  more  or 
less  under  the  control  of  some  strong  interest  con- 


SELLING  AN  INDUSTRY  l6$  . 

stituting  a  monopoly.  If  competition  is  present, 
prices  will  freely  respond  to  changes  in  the  business 
trend  and  to  changes  in  the  average  price  of  all 
commodities.  If,  however,  the  industry  is  a  prac¬ 
tical  monopoly,  prices  may  be  held  under  such  com¬ 
plete  control  that  changes  in  the  business  trend  and 
in  the  price  of  other  commodities  may  find  very 
little  reflection  in  the  price  of  the  industry’s  product. 

We  must  not  forget  that  the  labor  situation  may 
affect  future  producing  activity,  not  only  through 
wage  changes,  but  also  through  troubles  resulting 
in  strikes  and  boycotts.  Therefore,  the  character  of 
the  labor  used  in  the  industry,  the  extent  to  which 
it  is  organized,  the  nature  of  any  existing  agree¬ 
ments,  and  the  general  relations  of  employers  and 
employees  should  be  ascertained.  The  probability 
of  labor  troubles  in  other  industries,  especially  fuel 
and  transportation,  should  be  estimated. 

The  condition  of  the  money  market  should  be 
determined  with  the  idea  of  forming  a  judgment  as 
to  the  future  course  of  money  rates.  Increasing 
money  rates  mean  increased  interest  charges  and 
cost  of  working  capital,  while  a  decrease  in  money 
rates  means  the  contrary. 

The  probability  of  tariff  changes  should  be 
considered.  Increased  tariff  rates  on  the  product  of 
the  industry  will  tend  to  curtail  imports  and  enable 
domestic  manufacturers  to  maintain  prices  on  a 
higher  basis  than  if  the  importation  of  the  product 
were  unrestricted  by  import  duties. 


1 66  BUSINESS  FUNDAMENTALS 

The  crop  situation  has  a  bearing  on  the  future 
activity  of  most  industries,  because  the  farmer  buys 
approximately  30  per  cent,  of  all  the  manufactured 
products  produced.  When  good  crops  are  market¬ 
able  at  profitable  prices,  farmers  buy  freely,  and 
there  is  generally  a  good  demand  for  most  manu¬ 
factured  goods.  When  crops  are  poor  and  prices 
are  low  compared  with  the  prices  of  the  things  the 
farmer  buys,  he  curtails  his  purchasing,  and  the 
effect  is  immediately  felt  in  the  manufacturing  in¬ 
dustries.  Hence,  the  outlook  for  crops  and  the 
price  of  farm  products  are  important  items  to 
determine. 

An  eye  should  also  be  kept  on  the  progress  of 
legislation  at  Washington.  This  may  take  the  form 
of  tariff  or  price-fixing  discussions,  or  matters  relat¬ 
ing  to  the  labor  situation.  Despite  the  slogan  of 
less  government  in  business,  we  must  recognize  that 
there  will  always  be  considerable  government  in 
business. 

By  following  the  above  general  rules  you  will  be 
able  to  obtain  a  fairly  good  opinion  as  to  the  prob¬ 
able  purchasing  attitude  of  your  customers  in  each 
industry. 

Having  obtained  a  knowledge  of  conditions, 
present  and  future,  or  the  industries  to  which  you 
wish  to  sell,  you  are  in  a  position  to  plan  your  sales 
iand  advertising  campaigns  to  fit  your  customer’s 
needs.  You  have  time  to  prepare  for  increased  ac¬ 
tivity  and  can  be  on  hand  with  the  goods  when  they 


SELLING  AN  INDUSTRY 


167 

are  needed.  If  your  sales  field  embraces  more  than 
one  line  of  activity,  you  can  shift  as  conditions 
change  to  keep  your  efforts  concentrated  on  your 
best  market. 

When  the  outlook  is  unfavorable  and  an  industry 
is  to  go  through  a  temporary  decline,  your  studies 
will  warn  you  in  time.  Your  credit  department  has 
an  opportunity  to  get  cleaned  up  before  things  get 
too  tight,  and  your  sales  manager  can  avoid  waste  of 
time  and  money  on  a  barren  field. 

And  by  selling  as  described  above,  you  can  base 
your  decision  on  a  full  and  complete  knowledge  of 
conditions  as  they  are  and  will  exist,  you  will  avoid 
risk,  worry,  and  loss  —  in  fact,  make  the  most  of 
every  opportunity.  It  is  hardly  necessary  to  add 
that  it  will  enable  you  to  reduce  the  margin  of  error 
in  your  business  judgment  score  to  a  negligible 
fraction,  thereby  materially  increasing  both  your 
sales  and  your  net  profit. 


I 


Chapter  XII 

THE  TREND  OF  BUSINESS 

TANDARDIZATION  and  proper  distribution 
are  America’s  great  business  needs.  During  the 
last  twenty  years  or  more,  efficiency  in  manufactur¬ 
ing  processes  has  been  the  outstanding  development 
in  the  business  world.  Anything  that  would  in¬ 
crease  the  efficiency  of  workers  has  been  eagerly 
seized  upon.  Variations  in  methods  of  payment 
have  been  tried.  These  range  all  the  way  from  the 
making  of  detailed  studies  of  the  time  required  to 
complete  each  separate  operation  in  a  manufacturing 
process  to  methods  of  profit-sharing  whereby  the 
worker  earns,  not  only  his  pay,  but  also  a  share  in 
the  total  profits  of  the  company.  Most  careful 
scrutiny  has  been  exercised  in  reducing  the  time 
required  to  do  an  operation,  workers  being  in¬ 
structed  how  to  hold  their  hands,  how  to  stand,  how 
many  motions  to  make,  for  example,  in  putting  the 
soles  on  a  pair  of  shoes.  In  the  up-to-date  plant 
to-day,  some  form  of  all  these  various  efficiency- 
promoting  schemes  may  be  found. 

The  efficiency  so  noticeable  in  production  is,  how¬ 
ever,  almost  completely  lacking  in  distribution. 
From  the  time  a  finished  product  leaves  the  manu- 

168 


Mi 


THE  TREND  OF  BUSINESS  1 69 

facturer’s  hand  to  the  time  it  reaches  the  ultimate 
consumer,  the  manufacturer’s  selling  price  has,  in 
a  great  majority  of  cases,  been  doubled  and  tripled, 
on  account  of  the  cost  of  passing  it  through  a  num¬ 
ber  of  intermediate  hands,  and  the  profits  which 
each  middleman  feels  to  be  his  due. 

For  example,  a  cotton  shirtwaist  was  recently 
bought  in  a  Chicago  clothing  store  for  $6.95.  It 
was  taken  to  a  jewelry  store,  weighed,  and  found 
to  tip  the  scales  at  six  ounces.  Its  six  ounces  at  an 
average  price  for  cotton  would  cost  approximately 
10  cents.  One  reason  for  the  spread  between  the 
cost  of  the  raw  material  and  the  price  of  the  finished 
product  is  without  question  the  fact  that  women  all 
want  different  shirtwaists.  There  is  lack  of  stand¬ 
ardization.  Sugar  and  a  drop  of  peppermint  make 
peppermints  selling  for  50  cents  a  pound  —  yet  in 
New  York  sugar  sells  at  an  average  price  around  5 
cents  a  pound.  This  is  another  case  where  efficiency 
in  manufacture  is  overwhelmed  by  inefficiency  in 
distribution. 

You  may  say  that  the  retailer  is  making  an  enor¬ 
mous  profit  on  these  articles.  The  probabilities  are 
that  the  stores  do  not  make  even  a  fair  profit,  dur¬ 
ing  many  phases  of  the  business  cycle,  nor  does  the 
maker  or  distributor.  The  trouble  lies  in  the  system. 
That  the  system  can  be  changed  is  evident  when  we 
consider  the  match  industry.  Our  lowest  monetary 
unit,  the  cent,  will  purchase  a  box  of  matches. 
Matches  at  a  cent  a  box  represent  efficiency  both  in 


1 70  BUSINESS  FUNDAMENTALS 

production  and  marketing.  American  manufacturers 
are  competing,  at  a  cent  a  box,  with  the  Swedish 
and  Japanese  match  makers. 

The  match  represents  the  value  of  standardiza¬ 
tion  in  manufacture  and  distribution.  Machinery 
and  system  both  in  the  shop  and  in  the  market  result 
in  the  cent-a-box  match.  There  is  the  wood  in  the 
match  and  in  the  box.  There  is  the  chemical  com¬ 
pound  in  the  match  and  on  two  sides  of  the  box  — 
the  safety  kind.  There  is  some  printing  also.  Tak¬ 
ing  the  match  and  its  container,  the  manufacturer, 
the  jobber,  the  distributor,  and  the  retailer,  we  have 
an  operation  which  makes  us  wonder  that  we  get 
matches  for  a  cent  a  box.  There  is  an  efficient  system 
back  of  the  match. 

During  the  coming  twenty  years,  the  present  in¬ 
efficiency  or  lack  of  proper  marketing  methods  will 
tend  to  be  eliminated.  Just  as  concentrated  atten¬ 
tion  toward  the  goal  of  manufacturing  efficiency 
has  brought  results  during  the  past,  so  will  concen¬ 
trated  attention  toward  standardization  and  efficient 
distribution  bring  results  during  the  coming  years. 

In  the  working  out  of  this  simplification  we  shall 
witness  a  continued  development  of  chain  stores. 
They  are  having  a  tremendous  run  to-day.  They 
are  springing  up  like  weeds  in  every  community. 
Local  merchants  are  beginning  to  become  panic 
stricken.  They  fear  that  the  chain  store  is  to  swal¬ 
low  up  everything.  Grocers,  druggists,  and  clothiers 
are  especially  troubled.  Altogether  there  are  over 


THE  TREND  OF  BUSINESS  I7I 

a  million  small  merchants  in  America  who  are  vi¬ 
tally  affected  by  this  development.  There  is  no  sign 
of  slackening  in  it  for  several  years  to  come. 

The  chain  store  gives  the  public  what  it  wants  and 
prospers  for  that  reason.  If  the  local  merchant  will 
adopt  the  same  up-to-date  methods  of  economical 
merchandising,  he  need  have  nothing  to  fear  from 
chain  store  competition.  However,  the  chain  store 
will  encounter  the  same  obstacle  that  has  interfered 
with  efficiency  and  service  on  the  railroads  and  in 
manufacture  in  our  various  industries ;  namely, 
labor  unionization. 

Chain  stores  will  have  their  troubles  just  as  the 
railroads  and  manufacturers  have  had  theirs.  The 
unionization  of  labor  has  tended  to  raise  the  cost  of 
doing  business  in  both  transportation  and  manufac¬ 
turing  lines.  The  employees  of  chain  stores  have 
not  as  yet  become  unionized.  They  are  hard  work¬ 
ers  and  give  full  service  for  the  wages  they  receive. 
The  day  will  come  when  they  will  be  unionized. 
Clerks,  truck  drivers,  and  buyers  will  organize  and 
become  as  independent  as  the  typical  plumber  is 
to-day.  That  day  will  mean  the  end  of  the  phe¬ 
nomenal  progress  which  chain  stores  are  achieving. 
Then  the  chain  store  sales  will  drop  off,  operating 
expenses  will  increase,  and  they  will  have  to  adopt 
a  more  modern  form  of  merchandising  or  give  way 
to  a  new  order.  Distributors  by  chain  store  methods 
should  realize  that  labor  is  the  weak  spot  in  their 
armor. 


172  BUSINESS  FUNDAMENTALS 

Closely  allied  with  the  future  of  the  chain  store 
is  the  future  of  the  self-help  store.  This  is  not  a 
new  idea.  In  the  self-help  store,  the  customer  enters 
at  one  door,  proceeds  along  a  definitely  planned 
path  around  the  counters,  and  thence  out  an  exit 
door.  He  is  expected,  during  the  course  of  this 
passage,  to  help  himself  to  the  goods  he  desires  and 
pay  for  them  just  before  leaving  at  the  exit.  The 
self-help  system  eliminates  labor  difficulty  to  a  con¬ 
siderable  extent  and  enables  a  store  to  give  excellent 
service  at  low  cost.  The  saving  compared  with  the 
ordinary  cost  of  serving  a  customer  in  the  average 
retail  shop  is  large. 

The  self-help  idea  is  applicable  to  all  kinds  of 
stores  —  book  stores,  drug  stores,  grocery  stores, 
five  and  ten-cent  stores,  and  such  like.  It  is  true 
that  the  average  merchant  cannot  get  the  advantage 
of  collective  buying  unless  he  himself  joins  a  chain. 
Any  merchant,  however,  can  install  a  self-help  sys¬ 
tem  of  selling  independently.  This,  of  course, 
means  more  than  reorganizing  the  fixtures  of  his 
store.  He  must  change  his  entire  attitude.  The 
self-help  stores,  for  instance,  are  very  dependent 
upon  advertising;  much  more  so  than  are  the  chain 
stores  and  local  merchants.  The  latter  must  adver¬ 
tise  more  than  ever  when  he  adopts  the  self-help 
system. 

If  the  local  merchant  continues  as  at  present,  he 
will  be  eliminated  from  American  business  to  make 
way  for  more  modern  machinery  of  distribution. 


THE  TREND  OF  BUSINESS 


173 

The  self-help  store  is  a  step  along  the  line  men¬ 
tioned  in  the  previous  part  of  this  chapter  wherein 
efficiency  in  distribution  was  pointed  out  to  be  the 
goal  toward  which  business  men  would  strive  during 
I  the  coming  years. 

The  self-help  idea  is  analogous  to  the  pay-as-you 
enter  street  car.  The  idea  is  one  that  will  be  devel¬ 
oped  in  a  great  many  ways  and,  in  so  far  as  the  dis¬ 
tribution  of  goods  is  concerned,  it  may  be  expected 
to  be  developed  enormously  during  coming  years. 
This  does  not  mean,  of  course,  that  high-grade 
stores,  catering  to  people  who  wish  to  telephone 
their  orders  and  have  their  goods  delivered,  are 
going  out  of  business.  These  stores  have  been  de¬ 
veloped  to  a  great  degree  and  will  continue  to  func¬ 
tion  and  serve  the  people  who  wish  that  kind  of 
service.  The  big  development  will  be  in  connection 
with  the  self-help  idea. 

During  the  course  of  the  coming  years  more 
stress  will  be  laid  on  developing  the  efficiency  of 
buyers  in  contrast  to  the  efficiency  of  salesmen. 
Heretofore,  salesmanship  has  been  the  outstanding 
point  in  transactions  involving  the  exchange  of 
goods.  Huge  salaries  have  been  paid  to  exception¬ 
ally  good  salesmen.  While  buyers  have  been  in 
some  cases  well  paid,  generally  speaking  they  have 
not  been  on  such  a  high  basis  as  salesmen.  Salesmen 
are  frequently  placed  on  a  commission  basis  and 
are  spurred  on  by  all  kinds  of  inducements  to  in¬ 
crease  their  sales.  Buyers  but  infrequently  have 


I74.  BUSINESS  FUNDAMENTALS 

any  reward  coming  to  them  as  a  result  of  efficiency 
in  buying,  over  and  beyond  their  salaries.  Yet  a 
moment’s  thought  will  show  that  the  buyer  is  just 
as  important  in  any  transaction  as  the  seller.  Buyers 
are  not  always  enabled  to  sit  back  and  wait  for  the 
seller  to  come  to  them.  They  must  frequently  go 
into  the  market  and  cover  their  needs  at  whatever 
prices  they  can  obtain.  This  is  especially  true  in 
the  case  of  manufacturers  whose  producing  activities 
must  be  maintained. 

Frequently,  there  is  a  situation  wherein  all  but  one 
or  two  of  the  materials  necessary  to  continue  pro¬ 
duction  are  available.  It  is  then  necessary  to  obtain 
the  missing  materials  immediately  in  order  not  to 
block  operations.  An  efficient  buyer  under  such  cir¬ 
cumstances  may  be  able  to  save  his  concern  consider¬ 
able  money  by  intelligent  work.  Generally  speaking, 
therefore,  we  look  for  more  emphasis  to  be  laid  on 
efficient  buying  during  the  coming  years  than  has 
been  the  case  heretofore.  One  reason  for  the  exist¬ 
ence  of  the  present  high-priced  salesman  is  the  in¬ 
efficiency  of  the  present  buyer. 

There  will  probably  be  increased  demand  for 
trade  association  activity.  In  many  competitive 
lines,  individual  manufacturers  are  finding  that,  in¬ 
stead  of  competition  being  the  life  of  trade,  it  is 
frequently  its  death.  Individual  producers  are 
given  to  proceeding  in  the  dark  because  they  do  not 
know  what  other  manufacturers  in  their  line  are 
doing.  They  have  no  way  of  knowing  how  the 


THE  TREND  OF  BUSINESS 


175 

supply  of  their  product  compares  with  the  demand 
for  it.  They  cannot  adjust  their  producing  activity 
to  the  conditions  of  the  market.  As  a  result,  there 
are  frequently  periods  of  serious  over-production 
and,  conversely,  periods  in  which  stocks  are  very 
light  and  the  better  informed  manufacturers  reap 
a  harvest  because  others  have  sized  up  the  situation 
incorrectly. 

The  gathering  of  manufacturers  and  jobbers  into 
trade  associations  keeps  the  various  manufacturers 
informed  regarding  the  activities  of  their  industry, 
the  best  methods  of  producing  and  selling  their 
product,  and  the  general  business  policies  that 
should  be  followed  from  time  to  time  in  the  man¬ 
agement  of  their  concerns.  In  other  words,  by  mak¬ 
ing  greater  use  of  trade  associations,  the  future  will 
be  a  period  of  greater  co-operation  among  manu¬ 
facturers  and  jobbers  than  it  has  been  heretofore 
when  cut-throat  competition  was  largely  the  rule. 

Along  with  the  formation  of  trade  associations  in 
various  lines  of  industry  and  business,  there  will 
naturally  arise  an  increasing  demand  for  statistics 
covering  production,  sales,  prices,  costs,  etc.  These 
will  become  available  because  it  will  be  by  means 
of  them  that  an  association  will  keep  its  members 
informed  of  conditions  in  its  own  and  related  lines. 
/  Another  development  that  is  in  prospect  is  the 
business  counselor  or  commissioner.  For  the  same 
reason  that  certain  cities  have  done  away  with  may¬ 
ors  and  boards  of  aldermen  and  placed  their  affairs 


I76  BUSINESS  FUNDAMENTALS 

in  the  hands  of  a  business  administrator  on  a  salary 
basis,  the  various  industries  will  place  their  affairs 
in  the  hands  of  a  commissioner  who  will  so  organ¬ 
ize  the  affairs  of  the  industry  as  to  bring  the  great¬ 
est  amount  of  profit  to  the  concerns  in  that  industry. 
The  commissioner  now  at  the  head  of  the  moving 
picture  industry  is  an  example  of  this  probability. 
The  appointment  of  a  federal  judge  as  high  com¬ 
missioner  of  baseball  is  another  example. 

The  coming  twenty  years  should  see  a  resumption 
of  the  constructive  activities  of  so-called  “  captains  ” 
of  industry.  The  meaning  will  be  clear  when  we 
consider  that  the  period  of  1880  to  1900  was  a  pe¬ 
riod  in  which  great  fortunes  were  established  by 
industries  conceived  and  developed  by  men  who 
started  comparatively  poor  and  unknown  and  finally 
emerged  as  leaders  in  the  business  world.  They 
were  really  captains  of  industry  and  their  wealth 
might  be  termed  constructive  wealth.  During  the 
period  between  1900  and  1920,  however,  the  out¬ 
standing  figures  in  the  business  and  financial  world 
were  speculators.  Roosevelt  characterized  their 
wealth  as  predatory  wealth,  in  contrast  to  construc¬ 
tive  wealth.  Of  course,  there  were  a  few  outstand¬ 
ing  exceptions  in  the  last  twenty  years  but  the  ma¬ 
jority  of  the  prominent  figures  were  speculators. 
During  the  coming  twenty  years,  however,  business 
men  of  the  type  of  Carnegie  and  Hill  will  again 
come  to  the  fore.  The  foundation  of  their  indus¬ 
tries  will  be  service  and  efficiency .  ) 


Chapter  XIII 


FINANCIAL  INDEPENDENCE 

A  FEW  years  ago  an  investigation  and  study 
was  made  of  the  financial  experience  of  the 
average  man.1  It  shows  his  position  at  various 
ages  and  reveals  a  condition  that  demands  a 
remedy. 

If  we  begin  with  one  hundred  average  men  we 
find  them  entering  the  business  world  between  the 
ages  of  sixteen  and  twenty-four,  depending  on  how 
much  time  they  spend  in  school.  The  ten  years 
between  twenty  and  thirty  should  really  be  charged 
to  education.  During  this  period  a  job  should  be 
worth  what  it  teaches  and  not  what  it  pays.  It  is 
safe  to  assume  that  any  money  earned  over  and 
above  the  amount  necessary  to  pay  living  expenses 
is  spent  along  educational  lines.  Correspondence 
courses,  night  classes,  and  good  books  constitute  a 
most  profitable  investment  at  this  particular  point 
in  a  man’s  career.  We  can  assume  then  that  our 
average  individual  reaches  thirty  with  a  reasonable 

1  The  figures  in  this  survey  have  been  questioned  because  they 
do  not  check  exactly  with  the  mortality  tables  of  the  great  life 
insurance  companies.  A  thorough  investigation,  however,  dis¬ 
closes  the  fact  that  the  estimates  on  financial  conditions  are 
reliable.  They  are  an  underestimate  of  the  facts  rather  than 
an  overestimate. 


177 


BUSINESS  FUNDAMENTALS 


I78 

education  and  some  valuable  experience  in  at  least 
one  line  of  work. 

At  thirty-five  we  begin  to  see  a  decided  change. 
Five  out  of  our  hundred  men  have  diedy  ten  out  of 
the  hundred  have  become  wealthy y  ten  more  are  In 
good  circumstances  and  are  considered  well-to-do y 
forty  are  In  moderate  circumstances y  are  earning  a 


AGE -35 


AGE -45 


Age  35,  10  wealthy,  10  well  off,  75  self-supporting,  5  have  died. 

Age  45,  4  wealthy,  65  self-supporting,  15  non-supporting,  16 
have  died. 

living  for  themselves  and  families  —  they  seem  to 
be  getting  on.  T he  remaining  thirty -five  have 
shown  no  improvement  In  their  condition .  They  are 
holding  their  jobs  and  earning  the  salary  of  the 
average  man  ten  years  their  junior. 

At  forty- five  eleven  more  have  died  —  sixteen  in 
all.  But  four  of  the  hundred  that  started  twenty- 
five  vears  before  are  wealthy.  These  are  four  of 


FINANCIAL  INDEPENDENCE  1 79 

the  ten  who  were  wealthy  at  thirty-five  7  the  other 
six  have  lost  their  money. 

The  ten  who  were  in  good  circumstances  at  thirty- 
five  are  now  classified  with  the  sixty-five  who  are 
still  working  and  are  self-supporting  but  who  have 
no  resources  outside  of  their  regular  salary  or  wage. 
Fifteen  men  out  of  our  hundred  are  no  longer  self- 


AGE-55  AGE -65 


Age  55,  1  wealthy,  3  well  off,  46  self-supporting,  30  non¬ 
supporting,  20  have  died. 

Age  65,  1  wealthy,  3  well  off,  6  self-supporting,  54  non-support¬ 
ing')  36  have  died.* 

supporting  owing  to  illness,  accident,  or  other  cir¬ 
cumstance.  A  few  of  them  are  still  earning  some¬ 
thing,  but  not  enough  to  support  themselves. 

At  fifty- five  but  eighty  of  our  men  remain  — 
twenty  have  died.  One  of  the  four  who  was 
wealthy  at  forty-five  has  become  very  rich.  Two 
of  the  four  are  still  in  good  circumstances,  but  the 
other  has  lost  everything.  One  of  the  sixty-five 


l80  BUSINESS  FUNDAMENTALS 

who  was  working  and  depended  upon  his  salary  at 
the  age  of  forty-five,  has  become  wealthy.  This 
gives  us  three  in  good  circumstances  at  the  age  of 
fifty-five.  Forty-six  are  still  working  for  their  liv¬ 
ing  without  any  accumulation.  Thirty  are  more  or 
less  dependent  upon  their  children,  their  relations, 
or  upon  charity  for  support. 

At  sixty-five  we  witness  the  last  act  of  the  trag¬ 
edy.  Thirty-six  of  our  hundred  representative 
American  men  are  dead,  one  is  still  rich,  three  are 
wealthy,  six  are  still  at  work  and  self-supporting, 
fifty-four,  or  over  half  of  them,  are  dependent 
upon  children  or  relations  and  charity. 

The  real  tragedy  of  this  deplorable  situation, 
however,  is  revealed  by  the  fact  that  ninety  of  these 
hundred  men  made  enough  money  between  thirty 
and  fifty  to  keep  themselves  and  their  families  in 
comparative  luxury  for  the  rest  of  their  lives. 

Analysis  shows  that  our  school  system  is  partly 
to  blame.  The  average  man  spends  eight  years 
in  grammar  school  and  then  may  add  four 
years  in  high  school.  A  few  continue  and  add  four 
more  in  college  or  university.  All  of  this  time  is 
spent  in  learning  things  which  may  be  helpful  in  the 
making  of  money.  Not  one-half  hour  is  spent  in 
teaching  the  student  what  to  do  with  the  money  after 
he  gets  it;  and  there  is  very  little  sense  in  spending 
the  best  part  of  one’s  life  in  working  hard  to  get 
a  few  dollars  if  those  dollars  do  not  earn  for  you 
after  you  get  them. 


FINANCIAL  INDEPENDENCE  1 8 1 

Coming  out  of  school,  the  average  American  boy 
goes  to  work  with  a  vengeance.  He  is  ambitious,  he 
works  hard,  he  learns  rapidly,  and  is  soon  able  to 
produce  more  than  he  actually  needs  for  his  own 
living  expenses.  Sooner  or  later  he  finds  himself 
with  a  few  dollars  to  spare,  a  few  dollars  that  are 
available  for  investments.  In  nine  cases  out  of  ten 
he  either  lets  this  money  around  where  it  earns 
nothing  for  him  or  u  invests  ”  it  in  some  promotion 
—  oil  well,  gold  mine,  egg  preservers,  paper  milk 
bottle,  or  wireless  telephone  wire  —  it  makes  little 
difference  which.  He  loses  it  all.  And  so  it  goes, 
for  the  next  twenty-five  or  thirty  years  he  makes 
much  money,  saves  some  of  it  quite  by  accident,  and 
loses  by  far  the  larger  portion  of  what  he  saves. 

If  you  are  to  avoid  this  same  tragic  experience, 
you  must  employ  fundamental  principles  in  the 
handling  of  your  surplus  funds  exactly  as  you  do  in 
the  conduct  of  your  business.  If  you  will  take  the 
trouble  to  study  and  follow  the  few  principles  out¬ 
lined  in  the  remainder  of  this  chapter  and  in  the 
next  two,  you  will  have  a  definite  and  scientific  plan 
that  will  carry  you  to  financial  independence  exactly 
as  any  well-marked  highway  will  carry  you  to  the 
city  and  its  terminus. 

Obviously,  we  must  first  have  a  fund  before  we 
can  do  any  investing.  In  most  cases  that  fund  must 
be  accumulated  by  saving  a  part  of  the  money  that 
is  earned.  Right  here  the  average  man  makes  his 
first  mistake  5  he  does  not  save  systematically  and 


182 


BUSINESS  FUNDAMENTALS 


therefore  saves  about  one-half  to  one-tenth  as  much 
as  he  should.  If  he  tried  to  run  his  business  in  the 
way  he  finances  his  home  —  without  any  definite 
plan —  he  would  end  in  bankruptcy  inside  of  a 
year.  Home  expenses  should  be  budgeted.  In¬ 
telligent  planning  in  advance  will  enable  you  to  live 
just  as  well  as  you  do  now  and  with  much  less 
expense. 

It  is  almost  an  axiom  that  there  is  more  fun  in 
saving  than  in  reckless  spending.  We  shall  solve 
the  saving  problem  by  employing  this  very  prin¬ 
ciple.  Saving  is  no  trick  at  all  when  you  have 
learned  how  to  “  spend  money  at  your  bank.”  You 
will  never  get  anywhere  if  you  try  to  save  “  what  is 
left,”  but  if  you  will  make  up  your  mind  to  a  defi¬ 
nite  amount  that  can  be  put  into  the  bank  each 
month  and  then  put  it  there,  first  thing,  before  you 
pay  the  rent  or  anything  else,  you  will  find  your 
bank  account  growing  at  a  very  satisfactory  rate. 

The  following  table,  which  was  made  up  from 
the  Manning  budget  and  subsequent  study  made  by 
my  associates  gives  you  an  outline  average  for  va¬ 
rious  sized  incomes.  Please  bear  in  mind  that  the 
expenditures  noted  are  maximum  and  that  the  sav¬ 
ings  noted  are  minimum.  You  will  probably  be 
able  to  make  a  better  showing  than  the  figure 
indicated. 

Insure  for  protection  only.  I  personally  do  not 
recommend  endowment  policies  and  others  with 
semi-investment  as  well  as  the  protective  features. 


FINANCIAL  INDEPENDENCE 


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TYPICAL  BUDGETS  FOR  VARIOUS  INCOMES 
For  an  Average  American  Family  —  Two  Adults  and  Two  Children 


BUSINESS  FUNDAMENTALS 


184 

Buy  pure  protection  with  your  insurance  fund. 

The  remainder,  or  your  surplus,  must  next  be  di¬ 
vided  into  two  distinct  funds  —  one  an  investment 
fund  and  the  second  a  speculative  fund. 

The  investment  fund  is  to  be  placed  in  securities 
that  will  bring  in  a  regular  income  each  year.  The 
speculative  fund  is  to  be  used  to  purchase  certain  se¬ 
curities  which  you  expect  to  sell  later  at  a  profit. 
Broadly  speakingy  the  investment  fund  should  be 
used  in  the  purchase  of  stable  bonds,  the  speculative 
fund  for  your  common  stocks.  If  your  income 
i9  $5000  or  under,  it  is  possible  that  all  your  savings 
for  some  time  should  be  used  as  an  investment 
fund.  Speculation  should  be  attempted  only  by  a 
man  who  does  not  need  the  additional  income  and 
can  afford  to  wait  from  a  year  to  three  years  for 
his  profits. 


Chapter  XIV 

INVESTING  YOUR  INCOME 

THE  moment  your  savings  account  has  reached 
the  $1,000  mark  you  are  ready  to  begin  en¬ 
joying  two  incomes,  one  from  your  work  and  one 
from  your  investments. 

You  are  ready  to  start  the  selection  of  bonds  that 
will  provide  you  with  a  steady  and  comfortable  in¬ 
come  during  your  declining  years.  If  you  are  pur¬ 
chasing  in  any  quantity  it  may  be  well  to  deal 
through  a  regular  broker.  Select  one  who  is  well 
known,  of  excellent  reputation  and  a  member  of  one 
of  the  large  stock  exchanges.  For  smaller  purchases, 
deal  through  some  conservative  and  reliable  bond 
house  or  place  your  order  directly  with  your  own 
banker  who  will  purchase  for*  you  any  bonds  you 
may  want. 

What  then  are  the  fundamental  principles  by 
which  to  select  your  investments? 

First,  security. 

Since  you  are  lending  capital  to  obtain  income, 
you  should  be  satisfied  both  that  there  is  property 
in  form  that  cannot  be  dissipated  or  transferred 
without  record,  and  that  your  money  is  to  be  ap¬ 
plied  in  some  way  that  is  reproductive.  That  is,  it 

I8S 


1 86 


BUSINESS  FUNDAMENTALS 


does  not  satisfy  you,  as  an  investor,  when  you  know 
that  the  borrowed  money  is  going  only  to  pay  cur¬ 
rent  bills  or  bank  loans,  or  make  good  losses  that 
have  impaired  capital  beyond  retrieve. 

The  security  afforded  by  mortgage  is  a  matter  of 
degree,  expressed  under  general  headings  such  as: 

First  Mortgage, 

Refunding,  or  First  &  Refunding  Mortgage, 

General,  or  General  &  Refunding, 

Collateral,  or  First  Lien  &  Collateral. 

Except  as  the  term  u  first  mortgage  ”  is  used  by 
itself,  it  may  imply  much  or  little  in  regard  to 
security.  The  matter  must  be  examined  in  each 
case.  I  have  recommended  recently  a  first  and  re¬ 
funding  bond  which  has  a  first  mortgage  on  a  new 
part  of  the  property  that  I  would  rather  take  than 
any  under  the  original  mortgage. 

The  term  u  general  mortgage  ”  has  largely  sup¬ 
planted  the  earlier  and  franker  admission  of  sec¬ 
ond  or  third  mortgage. 

The  word  “  collateral,”  whether  by  itself  or  as 
first  lien  and  collateral,  puts  you  on  notice  imme¬ 
diately  for  further  inquiry.  Where  the  collateral 
deposited  as  security  for  your  bonds  is  wholly  stocks, 
your  position  has  slight  advantage  over  direct  stock 
ownership. 

Convertible  bonds  may,  or  may  not,  have  an  in¬ 
terest  in  mortgages  on  the  property.  The  better 
convertible  issues,  of  which  the  number  is  limited, 


INVESTING  YOUR  INCOME  1 87 

serve  a  very  satisfactory  purpose  at  certain  phases 
in  the  market  when  they  can  be  bought  practically 
on  their  investment  basis. 

The  term  “  debenture  ”  signifies  an  issue  without 
mortgage,  that  is,  a  note.  In  event  of  any  difficulty 
this  stands  no  better  than  bank  loans  and  other  bills 
payable.  It  has  become  the  custom  to  surround  de¬ 
bentures  with  certain  restrictive  covenants  which 
have  had  varying  degrees  of  success.  Usually, 
however,  if  a  waiver  of  rights  is  necessary,  to  save 
a  financial  life,  it  is  possible  to  obtain  the  required 
consents. 

Second,  marketability . 

It  is  not  indispensable  that  your  bond  be  listed  on 
one  of  the  stock  exchanges,  but  this  is  of  great 
assistance  in  keeping  track  of  your  investment.  It 
is  necessary  that  the  issue  you  hold  be  of  sufficient 
volume  and  importance  to  have  an  established  level 
of  buying  and  selling  among  dealers  at  some  of  the 
important  centers.  The  existence  of  such  a  market 
in  absence  of  listing  is  especially  notable  in  the  case 
of  municipal  bonds.  One  has  no  trouble  in  learning 
instantly  the  value  of  obligations  of  any  of  our 
larger  cities.  Contrary  to  the  impression  of  some 
persons,  the  lower  you  go  in  the  grade  of  bond,  the 
more  essential  it  is  to  have  quick  and  ready  market¬ 
ability.  The  danger  is  that,  even  should  you  have 
warning  of  impending  change  in  the  condition  of 
the  property,  you  could  find  no  means  of  selling  an 
unknown  issue. 


1 8  8 


BUSINESS  FUNDAMENTALS 


Third,  yield. 

Income,  of  course,  implies  that  there  must  be  con¬ 
fidence  in  earning  power.  The  term  yield,  as  used 
in  the  buying  and  selling  of  bonds,  is  one  of  the 
difficult  things  for  the  average  person  to  compre¬ 
hend.  It  combines  two  factors.  There  is  first  the 
annual  return  which  is  the  percentage  of  income  re¬ 
turned  upon  cost  of  the  investment,  as  for  instance 
$40  a  year  on  $800  invested  gives  5  per  cent,  an¬ 
nual  return.  There  is  the  second  factor  that,  at 
the  end,  say,  of  ten  years,  the  bond  matures  to  pay 
$1,000,  which  is  $200  more  than  you  put  in.  The 
true  value  of  this  amount,  received  at  the  end  of 
the  time,  for  each  year  while  you  are  waiting,  is 
determined  by  logarithmic  reckoning.  As  a  matter 
of  fact,  in  this  example,  while  annual  return  is  5 
per  cent.,  yield  is  figured  6.80  per  cent. 

It  is  not  necessary  that  a  man  expect  to  live,  or 
hold  the  bond,  to  its  maturity  date  in  order  to  get 
the  benefit  of  yield.  All  bond  transactions  are  made 
on  the  basis  of  yield.  No  mere  price  basis  could 
make  easy  reckoning  of  the  varying  maturity  dates 
and  coupon  rates.  Consequently,  if  a  man  buys 
to-day  and  sells  two  years  from  now  on  the  same 
yield  basis,  he  collects  his  due  proportion  of  the 
increase  in  principal. 

Fourth,  ethical  factors. 

Besides  the  three  items,  generally  identified  with 
bonds,  there  is  another  group  of  considerations  that 
seems  to  me  as  important  as  any.  There  certainly  are 


INVESTING  YOUR  INCOME  1 89 

good  and  bad  businesses.  The  process  of  the  years 
is  unmistakably  working  to  a  higher  moral  tone  in 
our  business  affairs.  Neglect  of  this  was  costly  to 
some  holders  of  distillery  and  brewery  securities. 

Fair  treatment  of  the  public,  of  employees,  of 
those  who  supply  raw  materials  and  those  who  dis¬ 
tribute  the  manufactured  product,  on  the  part  of  an 
industry,  augurs  a  much  more  prosperous  future 
than  any  u  public-be-damned  ”  attitude. 

There  is  discoverable  a  fundamental  trend  in  any 
given  group.  For  example,  the  chart  of  total  sales 
per  year,  compared  with  gross  earnings  per  year,  of 
certain  large  power  companies  shows  a  very  steady 
trend  to  a  decreasing  unit  price  for  the  output  sold. 
Where  this  has  been  accomplished  without  a  com¬ 
pensating  drop  in  net,  it  shows  increased  efficiency. 
This  is  one  of  the  best  grounds  for  confidence. 

As  many  of  you  know,  in  relation  to  railroads, 
the  “  operating  ratio  ”  is  studied  from  month  to 
month  as  revealing  the  story  of  improved  or  de¬ 
clining  fortunes. 

In  the  industrial  field  generally,  it  is  not  to  be 
denied  that  a  rather  disturbing  problem  is  presented 
by  the  tendency  to  increasing  overhead.  There  are 
many  examples  to  indicate  that  there  is  distinctly  a 
limit  to  efficiency  in  large  organizations. 

Bonds,  because  of  their  standard  denominations 
and  ready  negotiability,  have  become  the  typical  in¬ 
vestment.  There  is  a  bond  market,  just  as  there  is 
a  market  for  the  commodities  which  sustain  life  or 


BUSINESS  FUNDAMENTALS 


190 

clothe  or  house  us  and  for  the  stock  certificates  which 
represent  a  share  in  the  supply  of  them.  These 
commodities  tend  to  a  price  movement  directly  with 
the  business  trend,  being  worth  more  in  “  good 
times  ”  and  less  in  a  bad  times  ”  in  accordance  with 
the  effective  demand  —  that  is,  the  ability  of  the 
public  to  gratify  its  desires.  Bonds,  however,  are 
contracts  for  fixed  payments  in  money.  They  are 
sold  highest  when,  because  of  restricted  business, 
current  funds  command  lowest  interest  rates.  On 
the  other  hand,  a  steady  decline  in  bond  prices  fol¬ 
lows  high  interest  rates  due  to  a  shortage  of  money 
for  financing.  Over-expansion  is  a  sure  sign  of  the 
coming  of  depression. 

Let  me  state  a  concrete  example.  There  are 
many  bonds  selling  to-day  at  prices  higher  than 
since  1917.  But  after  1917  there  followed  three 
years  of  the  sharpest  drop  the  bond  market  had  seen 
since  the  Civil  War.  Should  you,  therefore,  sell 
bonds  now?  Turn  to  your  statistics  of  business  and 
study  fundamental  conditions.  In  1917  we  were 
in  the  early  stage  of  the  greatest  area  of  inflation  — 
or  “  good  times  ”  —  ever  recorded.  This  was  closed 
in  1920,  just  when  bonds  sold  lowest. 

Shall  you,  then,  sell  your  long-term  bonds  dur¬ 
ing  the  next  “  boom  ”  ? 

What  has  been  said  thus  far  has  had  reference  to 
the  business  trend.  There  is  still  a  further  factor  to 
consider  on  bonds  —  the  long-swing  trend  of  inter¬ 
est  rates.  This,  too,  bears  out  the  law  of  action  and 


INVESTING  YOUR  INCOME  I9I 

reaction.  From  each  peak,  in  our  experience,  rep¬ 
resented  by  an  investment  level  of  7  to  8  per  cent., 
there  has  been  a  general  trend  downward  for  twenty 
to  twenty-five  years,  to  half  the  rate  or  less,  fol¬ 
lowed  by  an  upward  trend  for  a  nearly  equal  period 
to  the  next  peak.  What  the  cause  may  be  — 
whether  the  slower  movement  of  fixed  capital  than 
commodities,  or  the  wastes  of  great  wars  with  which 
interest  peaks  coincide  $  or  whether  the  old  maxim 
“  shirtsleeves  to  shirtsleeves  in  three  generations  ” 
is  expressive  of  wastefulness  and  moral  breakdown 
that  underlie  both  wars  and  interest  rates,  I’ll  not 
here  attempt  to  say.  But  the  fact  is  a  fundamental 
for  investors.  It  is  responsible  for  what  is  some¬ 
times  called  the  major  bond  cycle. 

In  1920,  we  closed  such  a  cycle  with  the  yield  on 
investment  issues  at  a  high  point  not  recorded  since 
1878.  What  has  happened  since  1920  indicates  that 
we  are  now  in  a  new  phase.  Both  on  current  money 
rates  and  bond  yields  we  are  retracing,  almost  step 
by  step,  the  old  chart  of  reconstruction  days.  We 
are  doing  this  despite  factors  in  the  situation  that 
are  dissimilar,  such  as  our  change  from  a  debtor  and 
borrowing,  to  a  creditor  and  lending  nation.  A 
reason  for  the  turn  in  bond  yields  at  the  level  of 
1878  is,  doubtless,  the  fact  that  we  escaped  the  fiat 
money  basis  of  1873  because  we  had  such  an  im¬ 
proved  credit  position.  From  the  present  status  of 
the  bond  market,  I  expect  to  see  3^  per  cent.,  or  less, 
as  the  standard  investment  return  before  any  one 


192 


BUSINESS  FUNDAMENTALS 


■n 


INVESTING  YOUR  INCOME  1 93 

can  buy  on  a  7  per  cent,  basis  bonds  of  the  high 
grade  obtainable  within  the  last  twenty  months. 

The  relation  of  the  shorter  business  phase  and  the 
major  trend  in  money  rates  is  that  of  the  ocean 
waves  and  the  tides.  No  navigator  is  safe  without 
reckoning  them.  He  is  the  skillful  mariner  who 
knows  how  to  take  advantage  of  both.  Before  he 
will  venture  from  port  the  sailor  judges  his  craft 
for  seaworthiness.  Storms  will  come.  He  must, 


at  times,  be  working  against  wind  and  wave  and  tide 
as  well.  He  bases  his  judgment  on  statistics.  Ton¬ 
nage,  draught,  beam,  and  engine  power  are  consid¬ 
ered  in  the  light  of  conditions  at  sea  experienced 
over  a  term  of  years.  What  will  do  for  one  voyage 
will  not  do  for  another.  Above  all,  he  invariably 
demands  a  “  margin  of  safety.”  Very  similar  prin¬ 
ciples  apply  in  the  use  of  statistics  for  the  testing 
of  bonds. 

Certain  requirements  laid  down  by  law,  the  ac¬ 
cumulation  of  years,  restrict  the  investment  of  sav- 


194  BUSINESS  FUNDAMENTALS 

ings  bank  and  trust  funds  in  the  several  states.  The 
law  assumes  a  high  degree  of  inertia  about  these 
funds.  Purchases  are  made  by  vote  of  a  committee 
whose  opinion,  once  formed,  is  not  easily  reversed. 
It  not  infrequently  happens  that  the  bonds  are  held 
to  maturity.  Under  such  circumstances  security  is 
the  prime  essential.  Interest  return  and  yield  can 
be  accorded  only  secondary  consideration.  For  ex¬ 
ample,  Massachusetts  savings  banks  in  1922  bought 
first  mortgage  bonds  to  yield  4.75  to  4.80  per  cent., 
for  thirty  years,  while  private  investors  were  finding 
selections  fully  satisfactory  for  them  yielding  6  per 
cent,  or  better. 

Next  in  order  comes  a  large  investment  group 
classed  as  conservative  bonds,  satisfactory  for  the 
bulk  of  corporation  or  private  investment  funds. 
These,  aside  from  governments  or  municipals,  all 
are  issues  secured  by  mortgage,  .with  ample  equity, 
on  the  property  of  railroad,  utility,  or  industrial 
corporations  that  can  show  a  satisfactory  business 
record.  It  rarely  is  possible  to  admit  to  such  lists 
a  wholly  new  issue.  Preference  is  given  to  bonds 
which  have  been  outstanding  for  a  term  of  years  so 
that  they  have  “  seasoned.”  Furthermore,  such  is¬ 
sues  can  be  examined  for  their  record  of  marketabil¬ 
ity,  or  resale  value. 

All  other  bonds  which  are  worth  considering  for 
investment  come  under  the  general  designation  of 
business  men’s!  issues.  There  is  a  wide  difference 
in  merit.  A  certain  percentage  selected  from  such 


INVESTING  YOUR  INCOME  1 95 

a  list  may  be  taken  in  connection  with  the  proper 
amount  of  conservative  issues  for  any  person’s  own 
funds.  The  more  issues  over  which  this  part  of  a 
fund  is  distributed  and  the  more  restrained  one  is 
in  selecting  the  higher  yields,  the  larger  percentage 
of  his  fund  may  be  so  employed.  The  investor 
must  watch  the  effect  of  changing  business  condi¬ 
tions  and  be  willing  to  sell  on  notice. 

The  element  which  accounts  for  any  one  of  these 
bonds  continuing  to  sell  apparently  out  of  line  with 
the  general  market  may  be  either  — 

(a)  Lack  of  first  grade  security  in  its  claim 
against  property.  This  factor,  offset  by 
a  long  record  of  ample  earnings  and  the 
faithful  payment  of  interest,  may  still 
make  it  attractive  for  some  buyers. 

(, b )  Weak  earnings  record,  where  the  security 
is  a  first  claim  on  property  of  great  value, 
present  or  prospective.  In  this  situation, 
the  buyer  may  sometimes  be  warranted  in 
taking  a  bond  even  despite  the  possibility 
of  a  receivership.  Usually,  in  this  case, 
no  advantage  is  lost  by  waiting  until  the 
worst  has  actually  happened. 

The  best  business  man’s  purchase  is  a  bond  that 
has  come  through  a  drastic  reorganization.  I  do 
not  know  of  a  better  way  to  put  what  I  wish  you  to 
understand  than  to  say  that  a  business  man’s  bond  is 
the  sort  of  investment  into  which,  though  you  might 


BUSINESS  FUNDAMENTALS 


I96 

put  your  own  money  and  have  peaceful  nights,  you 
certainly  could  not  put  your  mother-in-law’s  money 
and  expect  to  have  peace. 

Diversification  is  one  of  the  fundamental  prin¬ 
ciples  of  investment  that  never  may  be  ignored.  No 
matter  how  strong  the  security,  or  how  attractive,  one 
never  should  deviate  from  the  policy  of  distributing 
his  funds  over  a  list  rather  than  concentrating  in  one 
or  a  few  issues.  Distribution  is  best  accomplished 
by  adopting  a  regular  unit  of  purchase,  say  one, 
three,  or  five  bonds.  The  law  of  averages  thus  is 
applied  to  any  element  of  risk.  No  benefit  is  gained 
by  “  averaging  ”  the  price  of  your  holdings.  This 
leads  to  doubling  up  in  those  things  which  have 
proved  your  poorest  selections  rather  than  the  best. 
Neither  is  it  good  policy  to  buy  two  or  more  differ¬ 
ent  issues  in  the  same  company. 

I  am  often  asked  by  some  of  my  clients  to  advise 
for  them  a  list  of  what  they  term  speculative  bonds. 
In  most  cases  the  speculative  element  is  the  only 
certainty  about  it.  Putting  this  in  the  form'  of  a 
bond  or  note  is  only  a  sugar  coating  which  serves  to 
induce  the  purchaser  to  stake  more  of  his  capital 
and  start  his  risk  from  a  higher  price  level  than  he 
would  consider  if  offered  stock.  There  are,  occa¬ 
sionally,  speculative  possibilities  in  defaulted  bonds, 
either  government  obligations,  direct  or  guaranteed, 
or  such  corporation  issues  as  have  some  real  assets 
behind  them.  But  it  is  much  easier,  with  any  ordi¬ 
nary  amount  of  capital,  to  distribute  your  risk  by  the 


INVESTING  YOUR  INCOME  1 97 

purchase  of  common  stocks  of  sound  corporations 
enjoying  a  listed  regular  market. 

Again  I  say,  it  is  fundamental  to  success  to  dis¬ 
tinguish  clearly  between  the  commitments  you  make 
for  speculative  profit  and  the  funds  you  invest  for 
income .  If  you  make  the  right  choice  of  bonds  and 
buy  them  at  the  right  periods  you  will  have,  from 
time  to  time,  a  very  substantial  increase  in  your  prin¬ 
cipal.  But  when  you  begin  to  pay  more  heed  to  this 
increase  than  to  the  security  of  income,  you  have 
started  on  the  road  to  paying  simply  a  high  price 
for  a  poor  speculation. 

The  financing  of  proposed  construction,  especially 
for  a  new  concern,  is  extra  hazardous.  It  should 
not  be  considered  unless  by  one  of  means  sufficient 
to  back  up  his  original  commitment  in  case  estimates 
go  wrong.  Too  often  the  best  laid  plans  fail  on 
some  miscalculation.  This  was  the  condition  re¬ 
vealed  in  the  ten-word  telegraphic  report  of  one 
engineer’s  investigation : 

“  Fine  dam  by  mill-site  —  no  mill  by  dam-site.” 

I  have  before  me  the  facts  of  a  very  re¬ 
cent  case  where  conditions  leading  to  a  receiv¬ 
ership  were  most  puzzling.  The  location,  industry 
and  market  seemed  excellent.  Construction  and 
equipment  were  rated  the  best.  Operations, 
for  a  period  of  months,  showed  a  margin 
over  cost,  but  disappointingly  small  as  com¬ 
pared  with  capital  charges.  A  bondholders’  protec¬ 
tive  committee  has  discovered  that  the  plant  never 


I98  BUSINESS  FUNDAMENTALS 

was  equipped  to  run  the  entire  process  upon  which 
estimates  were  based.  Lack  of  $150,000  to  com¬ 
plete  equipment,  after  many  millions  had  been  spent, 
throttled  operations.  The  backers  of  the  enterprise 
had  twice  been  to  the  banks  and  investors  to  sell 
bonds  and  apparently  dared  not  test  out  confidence 
by  returning  with  an  admission  that  the  estimates 
had  been  again  exceeded. 

It  is  in  order,  here,  to  comment  on  a  totally  dif¬ 
ferent  type  of  security,  in  favor  with  some  investors 
—  preferred  stocks.  I  earnestly  indorse  the  state¬ 
ment  of  one  of  Boston’s  best  known  investment 
bankers  that  cc  preferred  stocks  are  a  very  much 
overrated  type  of  security.”  Preferred  stocks  are 
not,  as  some  have  been  misled  to  believe,  the  equiv¬ 
alent  of  bonds  without  maturity.  They  cannot,  le¬ 
gally,  set  up  any  obligation  except  for  income,  if 
earned,  or  assets  in  liquidation,  after  all  debtsy  in¬ 
cluding  bonds  and  notes,  have  been  paid.  Restric¬ 
tions,  sinking  funds,  and  other  frills  are  waived 
invariably  when  need  arises,  as  the  last  two  years 
have  shown.  The  preferred  stockholder  is  rather 
in  the  position  of  a  silent  partner,  limited  as  to  share 
in  profits  and  without  voice,  under  ordinary  condi¬ 
tions,  in  management.  I  do  not  mean  that  no  pre¬ 
ferred  stocks  are  admissible  holdings.  I  do  mean 
that  a  selection  entirely,  or  in  large  part,  of  pre¬ 
ferred  stocks  is  not  an  investment  list.  Bear  in 
mind  that,  whereas  you  can  buy  the  preferreds  rela¬ 
tively  low  at  each  dip  in  the  stock  market,  every 


INVESTING  YOUR  INCOME  199 

three  to  five  years,  the  opportunity  to  select  bonds 
for  a  6  per  cent,  income  is  not  likely  to  return  in 
your  active  lifetime. 

The  preferreds  are  popular  in  a  few  states  where 
old  tax  laws  lay  a  heavy  burden  on  the  conscientious 
owner  of  bonds.  These  states  are  well-known  and 
names  of  investors  living  therein  are  eagerly  sought 
for  what  the  Street  calls  “  sucker  lists.”  To  the 
victims  of  the  “  tax-exempt  preferred  ”  promoters 
my  advice  is  that  you  get  together  and  demand  re¬ 
formation  of  your  tax  laws. 

Having  determined  what  to  buy,  there  is  then 
presented  for  the  investor  the  question  when  to  buy 
it,  and  when  to  sell.  Let  me  put  it  by  example. 

A  man  who  sold  out  his  business,  retiring  with 
$100,000  in  1901,  used  the  very  best  judgment  and 
selected  issues  like  Lake  Shore  3^’s,  Illinois  Central 
3^’s,  and  General  Electric  3^’s  all  around  ioi.  At 
that  time  he  was  content  with  $3500  a  year  for  his 
living.  From  that  day  to  the  present,  there  never 
has  been  the  slightest  question  about  the  security  of 
the  issues  in  which  he  invested.  Nevertheless,  in 
1920  his  principal  had  shrunk  to  $60, 000  and 
with  his  income  he  could  buy  only  a  $1,750 
living.  Another  man,  starting  the  same  way,  read 
the  signs  of  the  money  market  and  in  1912  began 
to  make  exchanges  out  of  his  old  bonds,  keeping  up 
with  the  increase  of  return  to  a  5  per  cent.,  and  then 
6  per  cent,  basis.  In  1913  to  1917,  he  accomplished 
complete  switching  over  into  short-term  notes  with 


200  BUSINESS  FUNDAMENTALS 

the  high-coupon  rates.  As  a  result,  he  maintained 
his  capital  fund  at  $100,000  and  arrived  in  1920 
with  an  income  of  $7,000.  Then,  following  the 
reversal  trend  of  money  conditions,  he  immediately 
changed  his  holdings  into  old  4  and  5  per  cent, 
bonds,  selling  at  great  discounts,  which  would  give 
him,  for  an  average  of  twenty  years,  an  income  of 
$7,000  a  year.  That  man  to-day  has  more  than 
double  the  buying  power  of  the  other.  His  prin¬ 
cipal,  instead  of  being  around  $100,000,  could  be 
marketed  for  $120,000.  It  is  these  advantages 
which  are  obtained  by  careful  study  of  the  invest¬ 
ment  situation. 

FINANCIAL  INDEPENDENCE  AT  FIFTY 

The  road  to  financial  independence  lies  open  for 
any  one  who  will  save  systematically  and  invest  in¬ 
telligently.  Not  before  in  my  lifetime  have  I  been 
able  to  speak  with  such  absolute  assurance  of  the 
long-pull  outlook  for  investments.  Not  again  in 
your  lifetime  will  you  find  a  point  quite  so  favorable 
at  which  to  start  to  accumulate  for  future  years.  Be¬ 
cause  of  our  position  to-day  in  reference  to  the  ma¬ 
jor  bond  cycle,  conditions  are  working  to  enhance 
the  value  of  whatever  you  put  aside. 

As  a  definite  suggestion  let  us  take  the  men  or 
women  of  thirty,  to-day,  who  can  put  aside,  say  $50 
a  month  or  $6 00  a  year  with  the  idea  of  building  up 
an  estate  that  will  take  care  of  them  in  their  declin- 


INVESTING  YOUR  INCOME  201 

mg  years.  Assume  that  they  buy  sound  conservative 
bonds  on  a  5  per  cent,  average  yield,  they  arrive  at 
the  age  of  fifty  with  a  sizable  estate  and  a  comfort¬ 
able  income.  If  the  interest  on  these  bonds  is  added 
to  the  principal  during  these  twenty  years  the  total 
will  amount  to  over  $20,000.  As  a  matter  of  fact 
it  is  perfectly  possible,  with  the  benefit  of  a  study  of 
fundamental  conditions,  to  get  an  average  return  of 
better  than  5  per  cent.,  say  6  per  cent.,  as  an  average 
yield,  on  such  a  fund.  But  we  will  figure  on  the  5 
per  cent,  basis. 

Because  of  the  present  reconstructive  phase  of  the 
bond  market,  the  appreciation  in  principal,  due  to 
falling  interest  rates  during  the  next  twenty  years, 
is  practically  certain.  This  factor  of  appreciation 
has  already  reached  20  per  cent,  on  sums  invested 
less  than  two  years  ago.  To  be  very  conservative 
the  benefit  to  the  bond  owner  spread  over  the  next 
twenty  years  will  average  at  least  1  per  cent,  a  year 
increase  in  principal.  You  would  have,  there¬ 
fore,  approximately  $25,000  in  your  investment 
fund  at  the  age  of  fifty ;  this  would  be  paying  you  a 
little  over  $100  a  month  income. 

If  you  have  other  outside  income  at  that  time  and 
can  afford  to  let  your  investment  fund  lie  for  ten 
years  more  without  adding  any  additional  savings  to 
it,  you  will  arrive  at  sixty  years  of  age  with  an  estate 
of  between  $40,000  and  $50,000,  and  a  monthly 
income  of  around  $200. 

If  you  are  younger  than  thirty  and  can  start  this 


202 


BUSINESS  FUNDAMENTALS 


plan  earlier  —  say  at  twenty-five  —  the  benefits  will 
be  correspondingly  greater. 

Should  you  feel  that  $200  a  month  is  not  suffi¬ 
cient  income  at  sixty,  simply  use  $5 o  a  month  as 
your  unit  of  saving  for  each  unit  of  income  and 
save  a  corresponding  amount.  One  hundred  dollars 
a  month  will  provide  an  income  of  $200  a  month  at 
fifty  or  $400  at  sixty.  Lest  you  think  that  I  am 
suggesting  a  plan  wholly  theoretical,  the  preceding 
chart  of  the  reconstructive  phase  of  the  bond  market 
will  make  plain  the  fundamental  reason  for  my 
assertion. 

Among  the  recollections  of  my  boyhood,  the  out¬ 
standing  impression  is  that  many  men  down  in 
Gloucester  retired  from  active  business  life  at  what 
would  now  seem  an  early  age.  Some  of  you  can 
recall  how  in  those  days  there  were  plenty  of  men 
from  fifty  to  sixty  who  seemed  to  live  in  relative 
luxury  on  their  incomes.  These  were  the  men,  as 
far  as  I  know  the  circumstances,  who  took  their 
accumulation  of  money  and  put  it  into  investments 
back  in  1 878,  just  at  the  beginning  of  the  last  up¬ 
swing  or  reconstructive  phase  in  the  bond  cycle. 
Yields  of  7  per  cent,  were  frequent  in  those  days 
and  incomes  were  much  smaller  than  would  be  ade¬ 
quate  now.  Twenty-five  thousand  dollars  was  suffi¬ 
cient  and  fifty  thousand  was  a  fortune. 

The  younger  men  of  this  generation  have  an  op¬ 
portunity  to-day  which  will  not  be  had  again  for 
some  thirty  to  fifty  years.  You  can  start  your  in- 


INVESTING  YOUR  INCOME  203 

vestment  fund  with  the  certain  knowledge  that  you 
will  have  increasing  bond  prices,  which  will  add  to 
every  dollar  you  save,  as  well  as  compound  interest 
which  alone  would  double  your  fund  every  dozen 
years.  Work  out  a  plan  that  suits  your  particular 
circumstances  and  begin  building  that  “  other  in¬ 
come  ”  to-day. 


IF  possible,  I  should  like  to  clear  up  the  more  or 
less  popular  conception  that  speculation  is  gam¬ 
bling  and  that  the  man  who  buys  and  sells  specula¬ 
tive  stocks  is  a  gambler. 

This,  of  course,  is  not  true  if  the  man  who  is 
speculating  is  doing  so  intelligently.  In  this  case 
it  is  not  only  a  perfectly  legitimate  and  profitable 
pursuit,  but  it  renders  a  service  to  the  entire  business 
community.  In  this  conception  doubt  was  due  to 
the  fact  that  the  speculative  market  does  offer  an 
opportunity  for  the  blind  guesser  who  buys  and  sells 
on  tips  and  hunches.  He,  of  course,  is  gambling 
exactly  as  if  he  were  betting  on  a  horse  race,  and 
he  doesn’t  last  long  unless  he  has  unusually  large 
resources.  The  majority  of  the  men  who  are  buy¬ 
ing  and  selling  speculative  stocks  to-day  are  oper¬ 
ating  on  a  more  intelligent  basis. 

The  stock  market  itself  presents  three  distinct 
phases.  In  its  movement  it  can  be  compared  with 
an  ocean. 

The  day-to-day  fluctuations  which  move  prices  of 
stocks  up  or  down  a  fraction  of  a  point  are  similar 
to  the  ripples  $  they  come  and  go  with  the  breezes, 

204 


SUCCESSFUL  SPECULATION  205 

are  logically  manipulated  and  artificial,  and  cannot 
be  foreseen  in  any  way.  The  day-to-day  trader  who 
tries  to  get  in  and  get  out  with  a  few  dollars  ahead  is 
doomed  to  disappointment.  The  market  is  rigged 
against  him.  As  soon  as  he  and  a  number  of  his 
fellows  have  bought,  the  price  is  pushed  down,  and 
when  they  have  been  scared  out  it  goes  up  again. 

The  second  phase  of  the  market  comprises  the 
intermediate  movement  of  a  few  points  in  one  di¬ 
rection  or  the  other  which  extends  over  several  days 
or  several  weeks.  They  are  very  similar  to  the  waves 
of  the  ocean  and  cannot  be  forecasted  any  more 
accurately  than  can  the  day-to-day  movement.  In 
most  cases  they  are  manipulated,  tips  are  circulated, 
the  stock  is  pushed  up  artificially,  the  general 
public  seeing  it  rise  buys  in  at  the  top,  then  the 
insiders  pull  the  string,  the  stock  goes  down,  the 
public  gets  scared  and  sells  out,  and  the  insiders 
have  cleaned  up.  Rather  than  try  to  play  the  day- 
to-day  movement  or  the  week-to-week  and  inter¬ 
mediate  phases  of  the  market,  you  had  better  try 
Monte  Carlo.  In  spite  of  the  fact  that  the  “  house  ” 
there  is  fixed  so  that  you  have  a  handicap  of  2  per 
cent,  you  still  have  a  much  greater  chance  for  your 
money  than  you  have  in  the  speculative  market. 

The  broad  movements  of  the  market,  however, 
are  governed  by  the  same  fundamental  laws  which 
govern  and  cause  business  cycles.  Over  a  period  of 
years  the  whole  market  rises  and  falls  with  almost 
clock-like  regularity*  What  is,  more,,  these  periods 


4 


20 6  BUSINESS  FUNDAMENTALS 

can  be  forecasted  with  remarkable  accuracy.  If  you 
have  but  the  patience  to  operate  in  accordance  with 
them  on  what  has  come  to  be  known  as  the  long- 
swing  method  you  can  buy  in,  at  or  near  the  bottom, 
hold  until  the  whole  market  has  risen  perhaps  fifty 
points,  and  sell  out  at  or  near  the  top.  By  keeping 
your  funds  liquid  on  the  down-swing  you  avoid  the 
loss  sustained  by  those  ,who  are  not  operating  in 
accordance  with  fundamental  conditions.  You  have 
your  cash  ready  to  buy  in  again  at  the  bottom  of 
the  cycle. 

This  makes  it  not  only  a  certain  and  greater  profit 
than  that  of  the  average  day-to-day  trader,  but  in 
following  it  you  are  also  of  distinct  service  to  the 
business  world.  To  begin  with,  the  period  of  accu¬ 
mulation,  the  first  stage  of  the  speculative  long 
swing,  invariably  comes  during  a  period  of  business 
depression.  Surface  conditions  in  business  are  nat¬ 
urally  and  invariably  discouraging,  industrial  profits 
are  small,  and  the  prices  of  industrial  stocks 
are  very  low.  The  average  man  is  pessimistic  and 
would  not  buy  if  he  had  anything  left  to  buy  with. 
The  long-swing  speculator  comes  into  the  market  at 
this  time  with  cash  in  hand  and  he  buys  his  stocks 
at  a  ridiculously  low  figure.  In  lending  his  support 
at  this  critical  time  he  also  tends  to  stem  the  tide 
of  the  depression  and  to  lend  a  certain  amount  of 
confidence  to  a  badly  disorganized  and  discouraged 
business  world. 

The  average  speculator  who  is  inclined  to  worship 


Long  Swing  Buying  and  Selling  Points 


208 


BUSINESS  FUNDAMENTALS 


the  “  here  and  now  ”  theory  has  seen  these  same 
stocks  come  down  from  a  high  level.  In  fact,  he 
has  probably  lost  money  on  them  all  the  way  down. 
Business  in  general  is  wavering  and  hesitant,  indus¬ 
trial  profits  are  very  small,  if  there  are  any  at  all. 
He  cannot  be  convinced  that  is  the  time  to  buy.  The 
man  who  has  courage  and  a  knowledge  of  funda¬ 
mental  conditions,  however,  is  not  deterred  by  these 
surface  conditions  5  he  buys  his  stocks  and  trims  his 
lamp  for  the  feast  that  is  to  follow. 

Following  this  period  of  accumulation  comes 
the  phase  of  rising  prices.  Even  before  business 
improvement  is  definitely  indicated  in  actual  in¬ 
dustrial  earnings,  the  stock  market  hears  rumors  of 
increased  activity  and  increased  profit.  As  stock 
prices  rise,  the  long-swing  speculator  begins  to  pile 
up  larger  paper  profits  and  the  stocks  keep  on  rising. 
There  is  a  temptation  to  sell,  but  fundamental  con¬ 
ditions  indicate  that  the  top  has  not  been  reached. 
In  the  meantime,  the  discouraged  outsider  begins  to 
sit  up  and  take  notice,  if  he  watches  the  stocks  rise. 
Later  on  in  this  period,  after  they  have  risen  to  a 
point  where  they  are  no  longer  in  the  strictly  bar¬ 
gain  class,  this  same  average  speculator  can’t  stand 
it  any  longer,  and  he  buys  in  possibly  twenty-five 
points  higher  than  the  level  at  which  the  long-swing 
speculator  purchased  his  holdings. 

As  the  general  public  comes  into  the  market  and 
business  conditions  begin  to  improve  we  travel  the 
trend  up  into  the  period  of  expansion.  Another  dis- 


SUCCESSFUL  SPECULATION  2C>9 

play  of  courage  is  here  called  for.  The  long-pull 
speculator  has  arrived  at  the  time  when  he  must  sell 
his  holdings,  now  showing  good  profits,  and  get  his 
capital  into  liquid  form.  He  must  do  this  in  spite 
of  coming  business,  rapidly  spreading  prosperity, 
strong  and  active  stock  and  commodity  markets,  and 
a  rampant  enthusiasm  on  every  hand.  These  times 
are  really  distinctly  unfavorable  3  they  are  the  danger 
signal  which  tells  the  coming  of  another  period  of 
depression.  They  mean  that  prosperity  having  ar¬ 
rived  has  been  overdone  as  usual,  that  a  period  of 
depression  will  follow,  and  that  it  will  be  overdone. 
The  long-swing  speculator,  therefore,  sells  his  stocks 
at  top  prices  and  puts  his  money  in  the  bank.  He 
has  made  from  25  per  cent,  to  over  100  per  cent, 
on  his  money. 

The  average  speculator  in  the  meantime  has 
made  some  money  during  the  last  half  of  the  rise. 
With  such  evidence  of  prosperity,  however,  he  can¬ 
not  be  convinced  that  it  is  time  to  sell.  He  believes 
that  things  are  going  to  keep  right  on  going  up, 
hence  he  continues  to  add  to  his  holdings,  and  when 
the  break  comes,  indicating  the  beginning  of  a  pe¬ 
riod  of  declining  prices,  he  is  completely  wiped  out 
or  is  forced  to  carry  a  list  of  high-priced  stocks  over 
a  period  of  three  to  five  years  down  through  the 
period  of  decline  until  he  gets  into  another  period 
of  prosperity,  when  he  may  be  able  to  sell  them  for 
what  they  cost  him.  Ordinarily  he  will  carry  them 
all  the  way  down  and  then  sell  them  out  at  the 


210 


BUSINESS  FUNDAMENTALS 


bottom,  unless  he  has  absorbed  some  wisdom  in  the 
meantime. 

Returning  now  to  our  long-pull  operator  we  may- 
say  that  with  the  cultivation  and  exercise  of  the  two 
qualities — courage  to  buy  and  to  sell,  and  patience  to 
hold  —  and  with  the  lesson  learned  that  the  market 
discounts  the  future,  the  present  being  a  faulty  basis 
for  speculation,  the  mastery  of  a  few  simple  rules 
is  all  that  is  necessary  to  turn  out  the  successful 
speculator. 

First  and  foremost,  one  should  remember  that  in 
every  major  movement  of  the  market  there  are  nu¬ 
merous  minor  phases.  These  positively  should  be 
ignored.  They  are  without  significance,  have  their 
basis  in  surface  and  not  fundamental  conditions  and 
the  attempt  to  follow  them  consistently  is  likely  to 
be  as  injurious  to  one’s  financial  operations  as  the 
dope  habit  to  one’s  character.  Trying  to  ride  up 
and  down  with  every  rally  and  decline  in  the  stock 
market  will  destroy  every  conviction  based  on  sound 
fundamental  principles  one  might  have  held  at  the 
beginning.  These  rallies  and  declines,  as  we  have 
just  said,  have  their  basis  in  surface  conditions,  tem¬ 
porary  developments  of  momentary  importance 
only,  contrasting  with  the  long-pull  or  major  move¬ 
ments  that  are  controlled  by  the  fundamentals. 
Surface  conditions  are  usually  a  reflection  of  the 
“  here  and  now  ”  which  we  have  referred  to  hereto¬ 
fore.  They  indicate  the  action  of  current  develop¬ 
ments,  such  as  the  publication  by  some  company  of 


SUCCESSFUL  speculation  211 

t 

a  good  or  a  poor  report,  political  doings,  crop  news, 
and  other  happenings  o£  the  day. 

The  technical  position  of  the  market  itself  has 
much  to  do  with  these  temporary  rallies  and  de¬ 
clines.  By“  technical  position  ”  I  mean  the  volume 
of  stocks  held  on  the  long  or  short  side  by  the  u  pub¬ 
lic.”  If  there  has  been  a  period  of  rising  prices, 
during  which  much  bullish  propaganda  has  been 
circulated  and  pools  or  stock  syndicates  have  dis¬ 
posed  of  their  holdings,  there  may  be  a  succession  of 
bear  attacks  or  short  selling  for  the  purpose  of  de¬ 
pressing  prices  and  influencing  the  public  mind  to 
sell,  which  is  not  a  very  hard  task.  On  the  other 
hand,  if  the  market  has  been  declining  for  a  few 
days  or  longer,  conditions  may  be  ripe  for  a  rally, 
and  with  the  aid  of  a  little  bullish  propaganda  the 
weak  short  interest  is  run  in  and  prices  recover  half 
or  perhaps  all  they  have  lost  in  the  preceding  period 
of  decline.  Anyone  who  can:  definitely  tell  what 
form  such  movements  will  assume  and  when  they 
will  break  out  would  have  child’s  play  in  explaining 
the  theory  of  relativity  and  the  fourth  dimension  to 
a  kindergarten  class.  The  best  safeguard  against 
the  influence  of  the  short  swing  is,  having  once 
adopted  a  position  in  accordance  with  the  funda¬ 
mentals,  to  forget  the  market  entirely. 

Another  pitfall  of  which  one  must  beware  is  the 
partial  payment  or  margin  method  of  trading.  It 
would,  of  course,  be  wrong  to  assume  that  all  mar¬ 
gin  traders  lose  money.  It  is  undeniably  true,  how- 


212 


BUSINESS  FUNDAMENTALS 


ever,  that  a  liberal  majority  of  the  speculators  who 
come  to  grief  do  so  because  they  had  been  holding 
their  stocks  with  some  stranger’s  money.  The  weak¬ 
ness  of  the  margin  method  is  contained  in  this  one 
fact  —  that  by  operating  with  borrowed  capital  de¬ 
pendent  position  is  necessarily  assumed.  Holding 
stocks  with  one’s  own  capital,  on  the  other  hand, 
permits  maintenance  of  a  strictly  independent  posi¬ 
tion.  Independence,  furthermore,  is  an  excellent 
tonic  for  one’s  peace  of  mind,  a  state  which  few 
margin  traders  ever  enter. 

To  take  up  another  phase  of  this  subject,  margin 
trading  may  be  said  to  lead  to  over-trading.  This 
practice  is,  in  simple  language,  biting  off  more  than 
one  can  chew.  Consider  the  case  of  a  man  ,who  puts 
up  $10,000  as  a  margin  to  buy  a  list  of  stocks.  The 
market  begins  to  appreciate  and  soon  shows  him  a 
paper  profit  of,  say,  $2,000.  The  next  step  is  the 
employment  of  this  $2,000  to  buy  more  stocks,  since 
it  is  so  easy  for  this  man  to  make  money  in  stocks. 
It  is  not  long,  however,  before  the  inevitable  shake¬ 
out  or  short-swing  reaction  occurs,  brought  on  by 
some  passing  development,  turning  the  $2,000  sur¬ 
plus  into  a  $2,000  deficit.  Whereupon  to  satisfy 
his  broker’s  call  for  margin  it  becomes  necessary  to 
sell  the  additional  stocks  he  bought  and  as  well 
some  of  the  original  commitments,  all,  very  likely, 
at  a  loss,  since  margin  calls  never  come  when  stocks 
are  going  up.  This  is  not  the  invariable  practice, 
for  some  have  the  courage  to  forego  u  pyramiding  ” 


SUCCESSFUL  SPECULATION  213 

or  the  use  of  paper  profits  as  margin,  but  it  is  com¬ 
mon  enough  to  warrant  the  conservative  operator  in 
shunning  altogether  the  method  that  so  many  others 
have  tried  and  found  wanting. 

The  practice  of  selling  stocks  short  is  still  another 
example  of  how  not  to  do  it.  This  method  seems 
just  about  as  plausible  and  is  fully  as  unreliable  as 
margin  trading.  The  theory  is  that,  if  one  can  make 
money  by  buying  stocks  and  holding  them  during 
the  course  of  a  bull  market,  or  period  of  rising 
prices,  why  isn’t  it  just  as  possible  to  profit  by  reason 
of  a  decline  in  stock  prices,  or  a  bear  market,  through 
the  medium  of  short  sales,  or  selling  what  one  does 
not  own?  Admittedly  this  theory  sounds  attractive, 
but,  among  others,  it  has  one  very  glaring  weakness. 
It  fails  to  take  account  of  one’s  inability  to  deter¬ 
mine  just  when  the  bear  market  is  to  begin.  A  sale 
just  a  little  too  soon  may  mean  the  loss  of  a  fortune. 
One  may  consistently  ask  why  this  is  so.  The  answer 
is  not  hard  to  give. 

The  end  of  every  bull  market  or  distribution  pe¬ 
riod  is  featured  by  wild  manipulation.  Prices  of 
individual  stocks  are  whirled  up  to  dizzy  heights. 
Not  infrequently  the  stocks  of  least  merit  and  poor¬ 
est  industrial  position  are  shot  up  as  high  as  the 
others  in  this  manipulative  orgy.  Hence,  the  fail¬ 
ure  to  anticipate  correctly  the  end  of  the  period  by 
even  so  short  a  margin  as  a  week  or  two  may  mean 
that  one  has  a  short  position  on  stocks  at  levels  50 
or  100  points  lower.  The  average  temperament  can- 


214 


BUSINESS  FUNDAMENTALS 


not  stand  such  a  strain  as  this;  so  the  common  result 
is  a  rush  to  cover  at  or  not  far  from  the  peak.  In 
a  short-sale  transaction,  moreover,  one’s  potential 
losses  are  unlimited,  while  in  a  long  transaction  one 
can  never  lose  more  than  the  number  of  points  one 
paid  for  holdings.  By  and  large,  short  selling  is 
hazardous  business  and  even  the  man  with  unlimited 
nerve  and  substantial  purse  frequently  is  caught. 
Others  would  do  well  to  confine  their  speculation  to 
outright  commitments  on  the  long  side.  So  much 
for  the  pitfalls,  short-swing  speculation,  margin 
trading,  and  short  selling. 

Now,  is  it  all  that  one  needs,  to  have  a  knowledge 
of  fundamental  conditions  and  their  relation  to  the 
stock  market  as  well  as  to  be  aware  of  the  weak¬ 
nesses  in  the  fabric  of  speculation?  Not  entirely  so. 
Before  we  can  turn  out  our  product,  the  successful 
speculator,  we  must  emphasize  the  need  of  knowing 
how  to  buy  stocks  as  wrell  as  when . 

This  seems  too  elementary,  one  will  say.  All 
that  is  needed  is  to  make  up  one’s  mind  to  buy  and 
then  give  one’s  order  to  the  broker  to  be  executed. 
True,  but  much  depends  upon  how  one  apportions 
funds  among  the  different  stocks. 

First,  let  us  say  that  it  is  necessary  to  hold  a  con¬ 
siderable  number  of  different  stocks  and  different 
classes  of  stocks  in  speculating  for  a  long  pull.  The 
reason  for  this  is  that  while  fundamental  conditions 
exercise  their  influence  on  the  movements  of  the 
market  as  a  whole,  none  can  say  which  particular 


SUCCESSFUL  SPECULATION  21$ 

stocks  or  class  of  stocks  will  participate  most  or  least 
in  the  upward  trend.  For  all  stocks  do  not  move 
alike  by  any  means.  The  solution  of  the  problem 
is  found  in  the  arrangement  of  purchases  in  such  a 
way  as  to  include  as  many  as  possible  different  issues 
and  different  groups  of  issues.  By  this  method  one 
is  placed  in  the  position  of  profiting  by  the  average 
movement  of  the  entire  list. 

It  .would,  of  course,  be  very  gratifying  if  one 
could  single  out  a  special  stock  or  special  classes  of 
stocks  as  more  likely  to  share  in  the  upward  move¬ 
ment  than  others.  This,  however,  cannot  be  accom¬ 
plished  any  more  readily  than  by  accurate  analysis  of 
the  short-swing  movements  of  the  market.  Concen¬ 
trating  one’s  attention  and  capital  on  a  single  issue  is 
speculation  on  the  basis  of  guesswork.  And  if  one  is 
willing  to  go  into  the  market  on  such  a  basis,  it 
would  be  better  by  far  to  place  one’s  affairs  in  the 
hands  of  trustees  and  go  into  seclusion.  The  wise 
and  conservative  policy  is  to  a  spread  out  all  over 
the  board,”  making  only  one  reservation.  This  one 
reservation  is  the  selection  of  seasoned  rather  than 
unseasoned  issues  and  groups. 

Every  expansion  period  witnesses  the  formation 
of  a  multitude  of  new  companies  and  the  launching 
of  new  industries.  Some  manage  to  stay  on  for  a 
few  years  or  longer  and  others  quickly  give  up  the 
ghost.  It  is  best  to  shun  them  all  until  they  can  be 
placed  in  the  class  of  well-seasoned  companies  or 
lines  of  business  of  known  record  of  accomplish- 


21 6  BUSINESS  FUNDAMENTALS 

ment.  With  this  one  reservation,  however,  as  many 
different  stocks  and  different  groups  that  are  in  a 
sound  position  as  one’s  capital  will  permit  should  be 
incorporated  in  one’s  list.  To  be  sure,  you  may  pick 
one  or  two  bad  ones,  but  the  small  amount  involved 
will  have  little  effect  on  the  final  result.  Better  a 
holding  of  twenty-five  stocks  with  one  disappoint¬ 
ment  than  the  singling  out  of  two  stocks  with  the 
risk  that  one-half  of  your  entire  investment  be  lost. 

Assuming  that  one  has  mastered  these  few  simple 
rules  and  successfully  shunned  the  traps  that  are  set 
for  the  unwary,  of  which  I  have  described  the  most 
common,  what  are  the  possibilities  of  profit  in  long 
pull  speculation?  Various  phases  differ,  of  course, 
and  no  hard  and  fast  rule  can  be  designated.  It 
is  a  wholly  conservative  statement  to  make,  how¬ 
ever,  that  an  average  of  20  per  cent,  each  year  is 
reasonable  to  expect  when  the  final  results  of  the 
period  are  recapitulated. 

POSSIBILITIES  OF  PROFIT  IN  CONSERVATIVE 

LISTED  STOCKS 

Suppose  $2500  had  been  invested  in  1861,  in  ten 
representative  stocks,  and  they  had  been  bought  and 
sold  again,  every  three  or  four  years,  what  would 
have  been  the  history  of  the  $2500?  To  what 
would  it  have  amounted  to-day? 

In  detail  the  answer  would  be  as  follows:  Start¬ 
ing  in  1861  with  an  original  capital  of  $2500,  the 


SUCCESSFUL  SPECULATION  21 J 

dividends  for  three  and  one-half  years  at  5  per  cent, 
amount  to  $70 5.  Assume  that  we  invest  the  $2500 
in  the  leading  stocks  of  1861  at  their  average  low 
price  of  62,  and  hold  the  stocks  until  the  average 
price  reaches  160  in  1865,  when  we  sell  for  6,448, 
which,  together  with  the  interest  above  mentioned, 
makes  a  total  of  $7,153.  We  leave  this  amount  on 
deposit  in  a  bank  for  two  years  at  4  per  cent., 
so  that  we  have  $7,737  to  invest  in  1867  when 
the  average  again  falls  to  100.  We  believe 
that  with  this  introduction  the  table  is  self-explan¬ 
atory. 

In  the  accompanying  table  5  per  cent,  is  allowed  as 
an  average  dividend  on  the  stocks  held  and  4  per 
cent,  an  average  interest  on  bank  deposits  or  the 
highest  grade  commercial  paper.  The  average 
prices  at  which  the  purchases  and  sales  are  executed 
are  the  “  averages  ”  at  the  beginning  of  each  of  the 
paragraphs  above  on  general  stock  prices. 

The  preceding  example  shows  that  $2500  con¬ 
servatively  invested  in  a  few  standard  stocks  about 
fifty  years  ago  would  to-day  amount  to  over  $1,- 
000,000.  These  are  not  only  strictly  investment 
stocks,  but  are  also  stocks  which  have  fluctuated  com¬ 
paratively  little  in  price.  This,  moreover,  was  pos¬ 
sible  by  giving  orders  to  buy  or  sell  only  once  in 
every  three  or  four  years. 

If  other  stocks  which  were  not  dividend  payers 
and  which  have  shown  greater  fluctuations  were  pur¬ 
chased,  and  advantage  had  been  taken  of  the  inter- 


218 


BUSINESS  FUNDAMENTALS 


Original  Principal  invested  @  62 

1861 

$2,500 

Dividends  35  yrs.  @  5%  to 

1865 

705 

Princ.  bought  @  62  in  1861,  sold  @  160 

1865 

6,448 

Total  Princ.  &  Dividends 

1865 

7,153 

Comp.  Int.  @  4%  2  yrs.  Princ.  &  Int.  to 

1867 

7,737 

Invested  @  100  in  1867 

Dividends  2  yrs.  @  5%  to 

Princ.  bought  @  100  in  1867  sold  @  144 

1869 

773 

11,131 

Total  Princ.  &  Div.  @5% 

1869 

11,904 

Comp.  Int.  @  4%  4  yrs.  Princ.  &  Int. 

1873 

13,926 

Invested  @  75  in  1873 

Dividends  1  yr.  @  5%  to 

1874 

928 

Princ.  bought  @  75  in  1873  sold  @  100 

Total  of  Princ.  &  Dividends  @  5%  to  1874 

1874 

18,560 

19,488 

Comp.  Int.  @  4%  yrs.  Princ.  &  Int. 

1877 

22,360 

Invested  @  55  in  1877 

Dividends  4  yrs.  @  5%  to 

1881 

8,130 

Princ.  bought  @  55  in  1877  sold  @  134 

Total  Princ.  &  Dividends  @5%  1881 

1881 

54,471 

62,601 

Comp.  Int.  @4 %  3?  yrs.  (June)  1881  Princ. 

&  Int.  to  Jan. 

1885 

71,825 

Invested  @  86  in  1885 

Dividends  4  yrs.  9  mos.  @  5%  to  Sept. 

1889 

19,836 

Princ.  bought  @  86  in  1885  sold  @  136 

1889 

113,587 

Total  of  Princ.  &  Div.  @5% 

1889 

133,423 

Comp.  Int.  @  4%  1  yr.  10  mos.  to  July  31, 1891 

Princ.  &  Int. 

1891 

143,385 

Invested  @  115  in  1891 

Dividends  1  yr.  @  5%  to 

1892 

6,235 

Princ.  bought  @  115  in  1891  sold  @  135  in 

1892 

168,345 

Total  of  Princ.  &  Div.  @  5  % 

1892 

174,580 

Comp.  Int.  @  4%  4  yrs.  Princ.  &  Int.  to 

1896 

204,234 

Invested  @  100  in  1896 

Dividends  6  yrs.  @  5  %  to 

1902 

61,269 

Princ.  bought:  100  in  1896  sold  @  190 

1902 

388,037 

449,306 

Total  Princ.  &  Dividends  @5% 

1902 

Comp.  Int.  @4%  1  yr.  Princ.  &  Int.  to  Oct. 

1903 

467,278 

Invested  @  146  in  1903 

Dividends  2  yrs.  3  mos.  @  5%  to 

1906 

36,005 

Princ.  bought  @  146  in  1903  sold  @  205  during 

Jan. 

1906 

656,102 

Total  of  Princ.  &  Div.  @5% 

1906 

692,107 

Comp.  Int.  @4%  1  yr.  9  mos.  to  Nov.  1907 

Princ.  &  Int. 

1907 

741,384 

Invested  @  119  in  1907 

Div.  1  yr.  8  mos.  @  5%  to  Aug. 

1909 

5i,9i6 

Princ.  bought  @  119  in  1907  sold  @  190  in  Aug. 

1909 

1,183,719 

Total  Princ.  &  Divs.  @5%  through  Aug. 

1909 

1,235,635 

Comp.  Int.:  4%  5  yrs.  3  mos.  to  Dec.  1914 

Princ.  &  Int. 

1914 

1,518,372 

Invested  @  128.3  in  Dec.  1914 

Divs.  1  yr.  @  5%  to  Jan. 

1916 

59,172 

Princ.  bought  @  128.3  in  *0*4  sold  @  146.6  in 

January 

1916 

1,734,937 

Total  Princ.  &  Div.  @5%  thru  Jan. 

1916 

1,794,110 

Comp.  Int.  @  4%  11  Mos.  to  December 

1918 

65,780 

Princ.  &  Int.  in  Dec. 

1917 

1,869,890 

Invested  @  90  in  Dec.  1917 

Divs.  2  yrs.  6  mos.  @  5%  to  June 

1920 

353,i8i 

SUCCESSFUL  SPECULATION  219 

mediate  fluctuations,  the  $2500  would  have  mounted 
to  much  larger  figures.  By  intermediate  movements 
is  not  meant  the  weekly  movements  which  the  ordi¬ 
nary  professional  operator  notes,  but  the  broader 
movements  extending  over  many  months  and  pos¬ 
sibly  a  year  or  more.  Nevertheless,  these  broader 
intermediate  movements  should  not  be  noticed  by 
a  conservative  investor,  as  it  is  possible  correctly  to 
diagnose  only  the  movements  extending  over  longer 
periods.  Many  brokers  believe  that  it  is  possible  to 
discern  also  these  intermediate  movements  of  six  or 
eight  months;  and  if  so,  the  following  results  would 
have  been  possible: 

$5,000  invested  in  St.  Paul  in  1870  would 
amount  to  over  $10,000,000  to-day. 

$5,000  invested  in  Union  Pacific  in  1870  would 
amount  to  over  $15,000,000  to-day. 

$5,000  invested  in  Central  of  New  Jersey  would 
amount  to  over  $30,000,000  to-day. 

$5,000  invested  in  Northern  Pacific  ,would 
amount  to  over  $50,000,000  to-day. 

These  figures  are  not  based  on  the  supposition 
that  the  investor  was  selling  at  the  top  of  every  rise 
or  buying  at  the  bottom  of  every  decline,  but  that 
the  transactions  were  made  at  average  “  high  ”  and 
average  u  low  ”  prices  based  upon  the  study  of  tech¬ 
nical  conditions. 


Chapter  XVI 

BUSINESS  PROBLEMS 

IF  you  will  look  over  the  community  in  .which  you 
were  born  it  will  be  found  to  have  this  general 
history:  families  rise  and  fall 5  industries  change 
and  the  city  or  village  must  either  go  ahead  or  go 
backward.  Nothing  stands  still  in  this  world. 
Everything  is  a  question  of  comparison.  Unless 
there  is  progress  there  is  deterioration  $  in  fact,  there 
must  be  a  certain  amount  of  progress  to  offset  the 
inevitable  depreciation.  Therefore,  one  does  not 
need  to  study  fundamental  conditions  simply  for 
the  purpose  of  increasing  his  business.  A  knowledge 
of  fundamentals  is  needed  for  purposes  other  than 
mere  money  making.  A  man  must  know  funda¬ 
mentals  in  order  to  exist  and  to  hold  his  present 
position  in  the  march  of  progress.  Therefore,  in 
these  final  chapters  let  me  review  briefly  the  various 
features  already  taken  up  in  this  book.  Let  us  ana¬ 
lyze  in  a  general  way  the  reason  for  failures,  and 
from  these  reasons  draw  constructive  plans  for  our 
own  work. 

Labor  Conditions: 

The  study  of  declining  businesses  shows  that  a 
misunderstanding  of  the  labor  problem  is  an  impor- 

220 


BUSINESS  PROBLEMS 


221 


tant  factor  in  causing  men  to  lose  their  businesses. 
This  applies  both  to  the  old  generation  and  to  the 
new  generation.  The  old  generation  was  brought 
up  on  the  “  master  and  servant  ”  principle.  The 
old  families  drew  a  broad  black  line  between  em¬ 
ployer  and  employee.  So  long  as  they  had  what 
they  called  u  faithful  workers  ”  —  workers  without 
courage  and  ambition  —  they  were  happy  and  pros¬ 
perous.  They  understood  handling  these  docile 
employees  who  looked  up  to  their  employers  intent 
only  upon  carrying  out  their  orders.  These  were 
the  kind  of  workers  they  had  in  the  “  good  old 
days  ”  —  workers  who  seldom  asked  for  more  pay, 
who  were  satisfied  with  their  condition,  and  who 
were  content  with  the  industrial  system  of  their  day. 

Without  doubt  the  old  industrial  system  had 
many  good  features.  In  those  days  men  and  women 
were  willing  to  do  what  they  could  do  best,  and 
manual  labor  was  looked  upon  as  honorable.  People 
expected  to  work  and  enjoyed  work.  Producing 
and  creating  (was  a  pleasure.  They  did  not  work 
long  hours  because  they  were  forced  to  do  so,  but 
because  they  enjoyed  the  work  and  preferred  it  to 
staying  at  home,  which  was  often  the  only  alterna¬ 
tive.  In  this  way  conditions  have  changed  for  the 
worse.  It  is  very  unfortunate  that  to-day  work  is 
looked  upon  by  so  many  as  something  to  be  avoided. 
Furthermore,  the  prevalent  custom  of  doing  as  little 
as  possible  in  a  day  is  a  basic  reason  for  high  prices 
and  generally  unsettled  conditions.  In  many  ways 


222 


BUSINESS  FUNDAMENTALS 


employers  are  justified  in  wishing  that  the  “  good  old 
days  ”  and  the  good  old  labor  conditions  were  back. 

The  employers  of  those  days,  however,  did  make 
a  mistake  in  resisting  instead  of  recognizing  the 
changed  conditions,  especially  as  it  was  not  a  new 
thing  to  have  changed  conditions.  There  has  been  a 
constant  change  in  the  relation  of  employer  and  em¬ 
ployee  since  the  days  of  feudalism  and  slavery.  A 
constant  evolution  has  been  going  on  during  the  past 
thousand  years,  and  there  has  been  just  as  much 
change  during  the  past  generations  as  during  previ¬ 
ous  generations.  This  change  will  continue.  Why 
should  it  stop  suddenly  with  our  generation?  The 
employers  who  have  recognized .  this  change  and 
have  adapted  themselves  to  it  have  continued  in 
business.  Most  of  those  who  have  bucked  the 
change  have  fallen  by  the  wayside.  That  the  read¬ 
ers  of  this  book  may  recognize  that  these  changes  are 
inevitable  is  my  earnest  desire. 

Let  us  not  be  just  as  disgusted  with  the  next 
generation  as  the  old  generation  was  disgusted  with 
us.  As  we  attempted  to  start  where  our  parents  left 
off,  so  our  children  will  attempt  to  start  where  we 
leave  off.  As  we  struggle  to  better  our  conditions, 
so  our  employees  may  likewise  struggle  to  get  away 
from  us  and  be  independent.  Of  course,  in  such 
action  they  take  distinct  risks,  as  95  per  cent,  of 
those  starting  new  businesses  fail.  But  their  pur¬ 
pose  in  so  attempting  is  good,  and  we  should  not 
blame  them  for  it. 


BUSINESS  PROBLEMS 


223 

During  the  past  twenty  years  we  have  seen  labor 
unions  develop  to  an  amazing  extent.  These  are 
often  repulsive  to  those  who  have  built  up  a  business 
without  being  hampered  by  labor  leaders.  But  the 
labor  union  is  as  inevitable  as  the  income  tax.  When 
labor  unions  are  universal  all  will  be  affected  alike, 
and  no  one  concern  .will  be  worse  off  than  are  its 
competitors.  The  next  generation  will  take  labor 
unions  for  granted,  but  they  will  have  new  prob¬ 
lems  with  which  to  contend.  Socialism,  I.  W.  W.’- 
ism,  Bolshevism,  or  some  other  kind  of  “  ism  ”  will 
disconcert  the  young  business  men  of  twenty  years 
hence.  ( The  important  point  for  us  to  realize  is 
that  there  will  always  be  something  for  us  to  con¬ 
tend  with  along  labor  lines.  The  labor  problem 
always  has  existed  and  always  will  be  with  us. 
Moreover,,  I  would  not  give  much  for  a  people  who 
were  not  striving  to  better  themselves,  even  though 
they  may  be  doing  it  along  uneconomic  lines. 

This  does  not  mean  that  you  should  become  ac¬ 
tively  interested  in  the  labor  movement,  or  try 
experiments  in  profit-sharing,  shop  committee  man¬ 
agement,  or  in  any  other  untested  ideas.  It  is  just 
as  foolish  to  attempt  to  lead  the  procession  as  it  is 
to  drag  behind.  The  industrial  system  of  the  next 
generation  may  be  some  one  of  these  systems  which 
we  now  discuss  or  it  may  be  something  entirely  dif¬ 
ferent.  No  one  knows  to-day  what  will  be  the  solu¬ 
tion  of  the  industrial  problem,  or  what  industrial 
system  will  be  the  next  one  adopted.  My  desire 


224 


BUSINESS  FUNDAMENTALS 


simply  is  that  you  recognize  that  the  same  business 
cycle  which  we  have  been  considering  applies  to 
labor  and  the  relation  between  employers  and  wage 
porkers.  This  labor  movement  is  continually  in 
progress.  The  successful  business  man  will  adapt 
himself  to  these  changes  and.  attempt  neither  to  lead 
them  nor  to  resist  them. 

In  other  places  in  this  book  reference  has  been 
made  to  two  different  movements  in  progress  at  the 
same  time.  There  are  the  long-swing  or  great  tidal 
movements,  the  short-swing  or  the  wave  move¬ 
ments.  These  two  sets  of  movements  apply  to  labor 
problems  as  to  all  others.  There  is  the  long-swing, 
covering  a  period  of  twenty  to  thirty  years,  and 
there  are  the  shorter  periods  synchronizing  with  the 
Babsonchart.  I  have  no  fears  as  to  the  ultimate  out¬ 
come  of  the  struggle  between  employers  and  wage 
workers.  Gradually  those  who  have  money  will 
learn  to  give  up,  and  those  who  have  no  money  will 
learn  to  wake  up.  Employers  will  learn  the  lesson 
the  radicals  are  trying  to  teach,  and  the  wage  work¬ 
ers  will  learn  the  lessons  the  employers  are  trying 
to  teach.  Those  who  have  money  will  learn  that 
their  safety  and  prosperity  depend  upon  others  also 
being  well  off.  Those  who  have  not  will  learn  that 
righteousness,  industry,  and  thrift  are  the  basis  of 
all  prosperity,  and  that  we  can  all  have  more  only 
as  we  produce  more.  Before  that  time  comes,  how¬ 
ever,  there  will  probably  be  more  trouble  and 
distress. 


BUSINESS  PROBLEMS 


22  5 

We  refuse  to  learn  except  by  experience  and  there 
Is  no  reason  why  our  employees  should  be  different 
and  wiser.  Therefore,  the  present  uneconomic 
labor  conditions  may  be  carried  further  and  further 
until  they  bring  about  a  catastrophe.  Labor  may 
continue  its  methods  of  uneconomic  production  and 
avoiding  work  until  it  has  forced  the  world  into  an 
industrial  chaos.  Then,  however,  labor  will  come 
to  its  senses,  and  of  itself  start  out  on  a  new  tack 
to  increase  production  and  render  service.  Then 
.will  follow  a  great  era  of  prosperity  for  all  interests 
and  groups.  This  will  continue  until  another  gen¬ 
eration  which  has  not  known  of  the  vicissitudes  of 
its  ancestors  comes  into  being.  They  will  start  out 
on  some  new  “  ism,”  attempting  some  still  more 
radical  experiment,  and  again  there  will  be  trouble. 
The  next  thousand  years  will  probably  see  more 
progress  than  the  last  thousand  years,  but  there  will 
be,  as  in  the  past,  ups  and  downs  as  the  business  cy¬ 
cles  develop.  The  man,  however,  who  knows  funda¬ 
mentals,  and  the  principles  underlying  these  business 
cycles,  knows  the  period  that  he  is  in  and  the  period 
that  is  to  come,  and  can  thus  save  himself  from  the 
troubles  resultant  from  these  industrial  upheavals. 
Yes,  more  than  this,  he  can  capitalize  them  and 
profit  by  them  if  he  only  will. 

•  .  . .  r 

Buying  Commodities : 

Another  feature  which  has  broken  many  previ¬ 
ously  successful  business  men  has  been  an  attempt 


226 


BUSINESS  FUNDAMENTALS 


by  them  to  monopolize*  certain  trade  in  their  village, 
city,  or  country.  An  analysis  of  business  men  shows 
that  most  of(  them  do  not  deliberately  set  out  to 
make  money.  They  enjoy  their  business  as  we  en¬ 
joy  a  game  5  and  they  fight  in  it  as  our  ancestors 
fought  for  fish  and  fowl.  Consequently,  when  such 
men  accumulate  money  enough  and  a  business  which 
should  satisfy  them,  they  are  no  more  contented 
than  when  they  started.  They  love  the  game  so 
much  that  they  keep  on  playing  and  playing.  Not 
being  satisfied  with  their  success,  they  try  to  swamp 
competitors,  take  on  new  lines,  and  start  in  new 
fields.  In  many  cases  this  brings  disaster. 

Many  of  the  large  business  failures  have  been 
due  to  an  attempt  to  create  monopolies,  or  to  control 
the  prices  of  certain  raw  materials  or  products.  This 
has  almost  always  proved  a  mistake.  Never  in  the 
history  of  the  world  has  a  'permanent  monopoly  been 
established.  Corners  have  lasted  only  a  short  time. 
Much  more  money  has  been  lost  by  attempting  to 
control  markets  than  has  ever  been  made  by  that 
process.  As  you  go  forth  into  business  may  your 
motto  be  a  Live  and  let  live.”  Don’t  try  to  do  all 
the  business  in  your  community  or  in  your  line. 
Never  attempt  to  crush  competitors.  There  is 
enough  business  for  all.  Business  makes  business. 
Our  prosperity  ultimately  depends  upon  the  other 
fellow’s  being  prosperous  also.  In  order  for  us  to 
sell  goods  the  other  fellow  must  be  able  to  buy.  Let 
us  help  him  prosper. 


BUSINESS  PROBLEMS 


227 

Instead  of  trying  to  make)  money  by  cornering  the 
market,  our  great  opportunity  will  be  in  traveling 
with  the  market.  Most  of  the  successful  merchants 
are  those  who  have  studied  fundamental  conditions 
and  have  known  when  to  buy.  These  men  have  not 
attempted  to  stop  the  ebb  and  flow  of  the  tide,  but 
rather  have  planned  their  merchandising  to  take  ad¬ 
vantage  of  the  ebb  and  flow.  This  means  that  they 
have  bought  intelligently ;  they  have  studied  and 
been  guided  by  fundamental  conditions.  Either 
consciously  or  unconsciously  they  have  watched  the 
business  cycles  and  planned  their  merchandising 
campaigns  in  accordance  therewith. 

It  is  an  old  saying  that  anything  well  bought  is 
half  sold.  Certainly  the  greatest  losses  in  business 
have  come  from  over-buying,  or  from  loading  up 
at  the  wrong  time  in  a  business  development.  In 
a  previous  chapter  I  have  showed  that  a  few 
failures  are  a  dangerous  sign  and  many  failures  are 
a  favorable  sign,  as  far  as  future  business  is  con¬ 
cerned.  One  chief  reason  for  this  is  that  people 
become  very  optimistic  during  a  period  of  over-ex¬ 
pansion.  Having  been  caught  .with  a  shortage  of 
goods,  they  determine  never  again  to  be  so  caught, 
and  buy  very  heavily  believing  that  the  period  of 
over-expansion  will  continue  indefinitely.  Having 
seen  prices  rise  over  long  periods,  they  believe  they 
will  continue  to  rise;  so  they  buy  freely  irrespective 
of  prices.  When  the  period  of  decline  starts  and 
the  depression  follows,  such  persons  are  caught  with 


228 


BUSINESS  FUNDAMENTALS 


a  great  stock  of  goods  purchased  at  high  prices. 

Study  fundamental  conditions  in  connection  with 
your  buying.  The  four  periods  of  a  business  cycle 
apply  equally  as  well  to  the  prices  of  the  things 
which  you  must  buy  as  to  the  conditions  of  business 
itself.  If  the  commodities  in  which  you  deal  are 
now  too  low,  you  can  be  absolutely  sure  that  some 
day  they  will  be  too  high.  If  they  are  now  too 
high  in  price,  you  can  be  absolutely  sure  that  some 
day  they  will  be  too  low  again.  The  long-range 
price  trend  over  a  long  period  may  be  upward  or 
downward,  but  the  shorter  trend  is  continuing  in 
operation  just  the  same.  It  is  the  movements  due 
to  these  shorter  trends  —  rather  than  the  twenty- 
year  trends  —  which  interest  men  in  active  busi¬ 
ness. 

Hence,  the  great  importance  of  studying  funda¬ 
mental  conditions  when  buying  raw  materials,  man¬ 
ufactured  products,  and  commodities  in  general. 
Instead  of  having  this  trend  work  against  you  and 
cause  you  losses  the  thing  to  do  is  to  capitalize  it 
and  profit  by  it.  The  course  of  prices  is  much  like 
a  stream  of  water;  one  can  row  with  it,  or  one  can 
row  against  it.  The  ordinary  man  starting  in  busi¬ 
ness  is  like  a  farmer  building  a  water  wheel  on  a 
mill  river.  His  success  depends  upon  the  way  he 
sets  the  wheel.  The  important  thing  is  to  set  the 
wheel  so  that  the  running  stream  will  make  it  turn. 
The  important  thing  in  business  is  to  use  and  profit 
by  these  business  trends  instead  of  ignoring  them. 


BUSINESS  PROBLEMS  229 

As  great  losses  are  brought  about  by  refusing  to 
recognize  fundamentals,  so  great  profits  are  possible 
through  the  study  of  fundamentals.  This  is  espe¬ 
cially  true  in  connection  with  the  purchase  of  raw 
material,  merchandise,  and  commodities  in  general. 

National  Distribution: 

I  recently  visited  a  city  which  has  been  famous 
for  its  manufacture  of  one  product.  Nearly  all  the 
factories  are  engaged  in  the  manufacture  of  this- 
product,  and  almost  the  entire  income  of  the  people 
depends  on  its  sale.  Owing  to  changed  conditions 
this  sale  has  been  greatly  hampered  in  recent  years. 
Out  of  some  twenty  large  concerns  only  one  is  pros¬ 
perous  to-day.  The  prosperity  of  this  one  concern 
is  due  to  its  selling  methods.  Its  owner  alone  of 
all  the  manufacturers  of  the  city  recognized  that 
they  could  no  longer  depend  upon  jobbers  for  the 
sale  of  their  products.  He  alone  insisted  that  the 
product  must  be  sold  direct  to  the  consumer  by  mail. 
Against  the  advice  of  the  older  firms  in  the  city, 
this  young  man  burnt  his  bridges  by  severing  his 
connections  with  the  jobbers,  and  started  to  form 
a  direct  personal  connection  with  consumers  all  over 
the  country. 

The  first  effect  of  any  such  change  is  naturally 
depressing.  He  lost  much  trade  in  the  early  days. 
He  got  the  ill  will  of  the  jobbers  and  they  in  turn 
passed  this  ill  will  on  to  the  retailers.  The  banks 
withdrew  their  credit,  and  for  two  or  three  years 


230 


BUSINESS  FUNDAMENTALS 


the  situation  looked  bad.  This  man,  however,  was 
a  student  of  fundamental  conditions.  He  had  stud¬ 
ied  the  industry  and  the  sales  possibilities  as  an 
engineer  would  study  a  contour  map.  Without 
prejudice  one  ,way  or  the  other,  he  had  come  to  the 
conclusion  that  fundamental  conditions  in  the  mar¬ 
ket  had  changed.  He  found  that  the  goods  were 
now  being  purchased  by  a  different  class  of  people 
than  those  who  were  formerly  the  buyers,  and  for 
a  different  reason.  He  believed  that  the  retailers 
no  longer  had  the  same  incentive  to  push  these  spe¬ 
cial  goods  that  they  formerly  had;  but  would  natu¬ 
rally  push  a  competing  line  that  would  sell  more 
easily.  Hence,  he  stuck  to  his  proposition  to  sell 
direct  by  mail.  Suddenly  the  tide  turned  in  his 
favor.  Orders  came  in  at  a  tremendous  rate.  Suc¬ 
cess  justified  his  study  and  conclusions.  To-day  his 
plant  is  running  full  time  while  most  of  the  other 
plants  in  that  city  are  shut  down.  And  to-day  he 
has  the  one  successful  business  in  that  community, 
and  is  the  one  man  there  who  is  making  money. 

Yet  I  should  not  be  surprised  if  in  the  next  cycle 
he  is  superseded  by  some  other  firm.  He  is  now 
getting  on  in  years.  Although  he  was  the  first  man 
in  his  city  to  adopt  national  advertising  and  direct 
selling  by  mail,  yet  he  is  using  the  same  original 
methods  with  which  he  started  twenty-five  years 
ago.  Although  he  was  the  first  to  take  an  advanced 
step,  yet  he  has  been  satisfied  with  this  one  step 
forward  and  has  not  taken  a  second  or  a  third.  He 


BUSINESS  PROBLEMS 


231 

fails  to  recognize  that  conditions  are  continually 
changing,  and  are  changing  as  much  to-day  as  they 
changed  in  the  years  gone  by.  Twenty-five  years 
ago  he  recognized  changing  situations  and  adapted 
himself  to  them.  To-day,  however,  he  is  failing  to 
recognize  that  further  changes  are  still  in  progress. 
He  is  now  as  stubborn  as  were  the  other  manufac¬ 
turers  twenty-five  years  ago.  He  cannot  see  the 
light  of  the  future  any  more  than  they  could  see  it 
in  their  day  and  generation. 

Recognize  fundamentals  in  connection  with  the 
selling  of  goods.  Remember  that  evolution  is  con¬ 
tinually  in  progress  in  connection  with  the  natures 
and  desires  of  men  and  women.  The  cities  and 
communities  where  your  goods  could  best  be  sold  a 
few  years  ago  may  have  the  least  need  of  them  to¬ 
day.  Yet  there  are  many  fertile  fields  where  your 
products  to-day  are  very  much  wanted.  Hunt  up 
these  fertile  fields.  Business  is  always  good  some¬ 
where.  The  business  cycle  is  continually  in  progress 
but  it  travels  gradually  across  the  country  north  and 
south  or  east  and  west.  The  sun  rises  and  sets  once 
in  every  twenty-four  hours,  but  it  rises  at  different 
times  in  different  places.  When  we  in  New 
England  are  eating  our  breakfast,  the  people  in 
California  are  having  their  soundest  sleep.  When 
we  in  the  East  are  going  to  bed,  the  people  in  the 
West  are  busy  at  work.  It  is  the  same  with 
business.  Although  business  revolves  like  the  earth 
on  its  axis  and  every  section  has  its  day  and 


BUSINESS  FUNDAMENTALS 


232 

night,  yet  the  sun  of  prosperity  is  always  shining 
somewhere.  The  student  of  fundamental  condi¬ 
tions  will  always  know  where  that  bright  spot  is  and 
there  he  will  be  selling  his  wares. 

The  selling  of  goods  is  very  much  bound  up  with 
the  tastes,  customs,  and  fashions  of  the  people. 
These  likewise  are  changing  constantly  in  accordance 
with  definite  economic  laws.  We  criticize  women 
as  being  the  slaves  of  taste,  custom,  and  fashion,  but 
can  they  help  it?  If  they  cannot  help  it,  it  is  due 
to  the  fact  that  taste,  custom,  and  fashion  are  gov¬ 
erned  by  fundamental  laws.  If  this  is  so, it  is  entirely 
possible  to  forecast  the  changes.  This  is  being  done 
to-day  by  many  manufacturers  and  merchants.  The 
study  of  past  history  and  the  relation  between 
cause  and  elfect  is  teaching  these  men  to  forecast 
tastes,  customs,  and  fashions  of  a  year,  or  even  five 
years  hence. 

When  I  was  a  boy  there  was  a  great  demand 
for  salt  fish.  I  clearly  remember  how  my  father 
always  had  a  whole  salt  fish  hung  by  the  tail  in  the 
back  entry.  About  so  often  Mother  would  go  out 
and  cutj  a  piece  off,  and  we  would  have  what  is 
known  as  a  salt  fish  dinner.  Those  were  great  din¬ 
ners  consisting  of  codfish,  potatoes,  beets,  and  a 
gravy  made  sometimes  of  cream  and  eggs  and  other 
times  of  pork.  Then  followed  a  period  when  people 
refused  to  buy  whole  fish,  and  insisted  on  buying  it 
cut  up  and  “  boned  ”5  that  is,  with  the  bones  re¬ 
moved.  People  still  bought  cod  dried  and  salted, 


BUSINESS  PROBLEMS 


233 

but  they  wanted  it  packed  neatly  in  a  little  box.  The 
fishing  firms  who  were  the  first  to  recognize  the 
change  in  this  demand  made  a  great  deal  of  money. 
But  those  who  said  “  A  whole  codfish  is  good 
enough  for  me  and  I  guess  it  is  good  enough  for 
anybody,”  went  to  the  wall.  Note,  however,  that 
the  change  in  people’s  taste  would  not  stop  with  the 
desire  for  “  boned  ”  codfish. 

Mackerel  came  into  the  market  and  was  very  pop¬ 
ular.  A  great  demand  developed  for  salt  mackerel. 
Instead  of  being  dried  like  cod  and  haddock,  the 
mackerel  were  pickled  by  packing  them  in  buckets 
with  salt  and  water.  These  buckets  were  shipped 
all  over  the  country.  The  man  in  the  West  who 
had  been  brought  up  as  a  boy  in  the  East  could  take 
one  of  these  salt  mackerel  from  the  pickle  and  have 
a  broiled  fish  that  reminded  him  of  his  boyhood 
days.  So  the  demand  for  salt  mackerel  increased. 
Those  firms  that  went  into  the  mackerel  business 
made  a  lot  of  money  while  those  who  stuck  to  the 
cod  and  haddock  trade  did  not.  However,  after 
people  became  more  prosperous  they  were  no  longer 
satisfied  with  salt  mackerel.  They  wanted  fresh 
mackerel  and  fresh  halibut.  Thus  the  fresh  fish 
industry  came  to  be  developed.  Fresh  fish  is  to-day 
sent  in  refrigerator  cars  from  the  coasts  to  all  parts 
of  the  country.  You  can  get  as  fine  fresh  mackerel 
in  Chicago,  St.  Louis,  or  Denver  as  in  Gloucester, 
Mass.,  or  Portland,  Maine.  Many  firms  that  are 
now  in  the  fresh  fish  business  are  making  money, 


234 


BUSINESS  FUNDAMENTALS 


but  those  who  refused  to  recognize  the  change  in 
conditions  are  having  very  dull  business. 

We  find  still  another  change  in  fish  fashions.  Re¬ 
cently  I  visited  the  plant  of  the  largest  fish  concern 
in  America.  Only  one  department  was  at  work  full 
capacity.  Upon  asking  the  reason  that  this  one  de¬ 
partment  was  busy  and  not  the  others,  the  reply 
came,  “  Because  this  is  the  i  Ready-to-Fry  y  depart¬ 
ment.”  I  went  over  to  the  building  to  see  what  was 
being  done  and  there  I  found  them  cooking  fish  and 
potatoes,  mixing  them  together  and  canning  them. 
Each  can  contained  sufficient  to  make  six  fish  balls. 
This  is  the  stage  at  which  the  fish  business  is  to-day. 
While  my  father  was  satisfied  with  a  whole  cod  tied 
by  the  tail,  hanging  on  the  back  porch,  my  young 
people  will  buy  fish  only  when  it  is  cooked  and 
mixed  with  potatoes,  ready  for  immediate  use. 

We  well  might  stop  and  talk  on  the  laziness  of 
the  growing  generation  and  insist  that  as  codfish  and 
salt  mackerel  were  good  enough  for  us  they  should 
be  good  enough  for  the  generations  to  come.  But 
we  shall  never  make  business  successes  by  arguing 
along  these  lines.  If  we  are  to  make  a  success  in 
business,  we  should  recognize  these  changing  condi¬ 
tions  and  capitalize  them  instead  of  ignoring  them. 
If  you  are  not  successful  in  your  selling  to-day,  it 
is  probably  due  to  the  fact  that  you  do  not  recognize 
the  business  cycle  in  your  sales,  and  that  you  do  not 
take  advantage  of  the  changes  in  territories,  indus¬ 
tries,  tastes,  customs  and  fashions. 


BUSINESS  PROBLEMS 


235 


Retail  Merchandising: 

What  has  been  said  thus  far  applies  mainly  to 
national  distributors  who  are  interested  in  selling 
the  country  as  a  whole.  When  it  comes  to  the  re¬ 
tailer  in  a  given  city  the  problem  is  more  intricate 
and  the  need  of  studying  fundamentals  is  even 
greater.  I  say  this  because  the  national  distributor 
has  such  a  wide  territory  that  the  law  of  averages 
works  largely  in  his  favor.  This  is  not  so  true  with 
the  retailer,  who  is  dependent  upon  a  given  commu¬ 
nity  and  a  limited  area  for  his  market.  A  retailer, 
especially  in  a  city  with  diversified  interests,  should 
study  industries  in  connection  with  his  merchan¬ 
dising.  Moreover,  a  retailer  —  in  a  city  like  Brock¬ 
ton  dependent  upon  shoes,  or  Havana  dependent 
upon  sugar,  Memphis  dependent  upon  cotton,  or 
some  of  our  western  cities  dependent  upon  agricul¬ 
ture,  lumber,  or  mining  —  who  is  dependent  for  his 
trade  on  the  prosperity  of  some  one  industry  should 
give  much  attention  to  the  study  of  industries. 

Some  industry  is  always  prosperous.  Even  when 
business  is  poorest  a  merchant  in  New  York,  Chicago, 
or  Philadelphia,  or  any  large  city  can  do  good  busi¬ 
ness  by  studying  the  industries  of  his  city.  In  all 
large  cities  some  one  industry  is  always  prosperous, 
and  often  several  industries  are  prosperous.  There 
are  over  300  common  lines  of  activity  in  this  country, 
most  of  which  are  to  be  found  in  every  city.  There 
never  is  a  time  but  that  10  per  cent,  of  them  are 


236  BUSINESS  FUNDAMENTALS 

doing  well  and  5  per  cent,  of  them  are  relatively 
prosperous.  And  5  per  cent,  of  300  is  fifteen.  The 
able  retailer  will  always  seek  out  these  fifteen  or 
more  industries  and  will  purchase  the  goods  that  the 
people  engaged  in  them  will  want  and  will  buy. 

Many  merchants  fail  because  they  buy  only 
goods  which  they  themselves  like,  or  .which  they 
think  other  people  should  buy.  These  are  narrow¬ 
minded  small  merchants.  The  greatest  merchants 
absolutely  ignore  their  own  tastes,  wishes  and  prej¬ 
udices.  They  do  not  attempt  to  determine }  but 
rather  to  interpret  the  needs  and  desires  of  their 
customers.  Nothing  will  help  so  much  in  this  work 
of  interpreting  future  demands  as  a  study  of  indus¬ 
tries,  always  watching  for  the  industry  which  is 
over-expanding  and  the  industry  which  is  about  to 
be  prosperous. 

All  industries  go  through  their  own  phases,  but 
the  phases  do  not  necessarily  coincide.  I  have  in 
mind  four  industries  each  one  of  which  is  traveling 
through  a  movement.  Each  one  of  these  indus¬ 
tries  in  the  course  of  eight  years  enjoys  over-expan¬ 
sion,  decline,  depression,  and  improvement.  But 
as  I  look  over  these  industries  to-day  I  find  that 
each  one  of  them  is  now  in  a  different  period.  One 
industry  is  very  prosperous,  another  is  in  a  depres¬ 
sion,  the  third  is  in  a  period  of  decline,  and  the 
fourth  is  in  a  period  of  improvement.  A  student 
of  fundamentals  recognizes  these  changes  and  these 
facts.  One  who  is  interested  in  business  trends 


BUSINESS  PROBLEMS 


237 

is  keen  enough  to  know  that  every  industry  has  a 
phase  of  its  own.  Hence,  he  studies  industries,  es¬ 
pecially  the  industries  of  his  own  customers.  He 
is  not  content  to  know  simply  the  elementary  prin¬ 
ciples  of  merchandising.  He  delves  into  the  great 
fundamental  forces  controlling  the  business  of  his 
city.  He  is  able  to  forecast  when  each  will  be  pros¬ 
perous  and  when  each  will  be  depressed.  He  pur¬ 
chases  goods  to  suit  that  industry  which  will  next 
be  prosperous,  and  he  advertises  to  solicit  the  trade 
of  those  who  are  employed  in  that  industry.  In 
this  way  he  wastes  no  ammunition.  He  always  has 
on  hand  the  goods  which  are  wanted,  and  his  trade 
is  constantly  increasing. 

Men  are  naturally  ambitious.  You,  the  readers 
of  this  book,  are  ambitious,  for  otherwise  you  would 
not  bother  to  buy  and  study  it.  As  men  become 
successful,  however,  there  is  a  tendency  for  them  to 
rest  on  their  oars.  Having  once  carefully  studied 
their  business  they  are  prone  to  think  that  they 
know  all  about  it,  forgetting  that  changes  are  con¬ 
stantly  in  progress.  They  are  content  to  know  their 
own  industry,  but  do  not  take  the  pains  to  study 
other  industries  upon  which  their  customers  are  abso¬ 
lutely  dependent  for  the  money  with  which  to  buy. 
Hence,  a  merchant  becomes  rusty  as  he  gets  older 
and  his  position  in  his  community  is  gradually  filled 
by  younger  men  who  understand  the  needs  of  the 
new  generation. 

It  is  especially  important  that  we  older  men  keep 


23 8  BUSINESS  FUNDAMENTALS 

up  with  the  younger.  We  should  associate  with 
them  and  learn  their  wants  and  desires.  It  is  espe¬ 
cially  important  that  we  keep  in  touch  with  the  new 
industries  which  have  come  into  being  since  we  were 
young.  When  I  was  a  boy  there  was  no  automobile 
industry,  no  moving  picture,  industry,  and  almost  no 
electrical  industry,  although  most  readers  of  this 
book  will  take  these  industries  for  granted,  assum¬ 
ing  that  they  always  existed.  Remember  that  they 
are  new  and  that  other  industries  are  developing 
all  the  time.  Keep  acquainted  with  the  progress 
and  growth  of  all  new  activities.  Don’t  brand  them 
merely  as  fads,  but  recognize  them  and  capitalize 
them. 


Chapter  XVII 

INVESTMENT  PROBLEMS 

FEW  people  fully  realize  the  losses  which  are 
encountered  by  business  men  in  connection  with 
their  investments.  Many  who  were  successful  in 
business  and  retired  wealthy  have  since  lost  a  large 
portion  of  their  fortunes  through  carelessness  and 
ignorance  in  connection  with  the  investment  of  their 
money.  This  applies  not  only  to  those  who  have 
retired  or  inherited  money,  but  also  to  the  active 
business  man  of  to-day.  Most  business  men  will 
spend  months  in  making  a  few  thousand  dollars 
which  they  will  a  invest  ”  in  a  few  minutes.  It  is 
said  that  the  average  business  man  gives  less  time 
to  the  selection  of  an  investment  from  a  bond  cir¬ 
cular  than  he  gives  to  the  selection  of  a  lunch  from 
a  menu  card. 

Business  men  should  give  even  more  time  and 
study  to  the  investment  of  money  than  to  the  mak¬ 
ing  of  it,  as  money  is  harder  to  conserve  than  to  ac¬ 
cumulate.  And  the  business  man  and  those  who 
have  inherited  money  should  give  great  thought  to 
fundamentals.  It  is  absolutely  essential,  in  connec¬ 
tion  with  the  safe  and  profitable  investment  of 
funds,  to  understand  the  business  cycle  and  to  know 
what  period  we  are  in  at  any  given  time.  You 

239 


240 


BUSINESS  FUNDAMENTALS 


say,  “  John  Jones  has  made  a  lot  of  money  through 
investments  and  he  knows  nothing  about  funda¬ 
mentals.”  That  may  be  true,  but  the  reason  that 
John  Jones  has  made  a  lot  of  money  in  connection 
with  his  investments  is  because  he  happened  to  in¬ 
vest  at  the  right  time.  Moreover,  the  chances  are 
that  unless  John  Jones  soon  becomes  a  student  of 
fundamentals  he  will  some  day  invest  at  the  wrong 
time,  and  he  will  lose  a  good  part  of  what  he  has 
already  made. 

The  fact  that  the  rich  families  of  fifty  years  ago 
are  to-day  mostly  extinct  as  to  wealth  and  position 
does  not  mean  that  they  failed  in  business.  Many 
of  these  made  successes  in  business  and  retired  leav¬ 
ing  fortunes  to  their  families.  Through  un¬ 
wise  investments  or  failure  to  change  their  invest¬ 
ments  at  the  right  time  these  fortunes  have  been 
lost,  and  the  families  are  now  stranded.  In  many 
instances  the  parents  or  grandparents  invested  in 
what  was  the  best  for  their  day.  They  bought  New 
Haven  Railroad  at  200  a  share,  and  Boston  &  Maine 
at  a  corresponding  figure.  These  were  looked  upon 
as  the  most  conservative  investments  of  that  time, 
and  for  many  years  they  were  justly  so  classified. 
To-day  the  estates  with  these  interests  are  perhaps 
bankrupt.  New  Haven,  Boston  &  Maine,  and  many 
of  the  other  high-class  investments  of  that  day  have 
gone  by  the  board,  ceased  paying  dividends,  and  in 
most  cases  have  been  reorganized. 

The  fault  was  not  in  buying  these  investments 


INVESTMENT  PROBLEMS  2^1 

i 

but  in  indefinitely  holding  them .  The  law  of  action 
and  reaction  applies  to  investments  as  it  applies  to 
families,  commodities,  and  industries.  The  best  in¬ 
vestments  of  our  father’s  day  are  mostly  poor  in¬ 
vestments  to-day.  The  best  investments  of  to-day 
will  probably  be  poor  investments  for  our  children 
to  bank  upon.  The  business  cycle  is  continually  in 
progress.  Those  who  recognize  fundamentals  and 
study  fundamentals  can  prosper  in  connection  with 
their  investments,  while  those  who  ignore  funda¬ 
mentals  are  sure  to  lose. 

No  investments  stand  still.  Every  investment  is 
continually  growing  better  or  growing  worse .  They 
have  their  length  of  life  the  same  as  individuals. 
One  might  say,  they  are  born,  they  grow  up,  they 
mature,  and  they  die.  During  their  early  years  their 
mortality  is  very  great,  but  those  which  exist  a  cer¬ 
tain  length  of  time  mature,  only  to  die  ultimately. 
A  student  of  investments  does  not  buy  securities  of 
an  industry  until  that  industry  is  sufficiently  estab¬ 
lished  so  that  it  will  surely  grow  up;  but  later  when 
it  is  matured,  he  sells.  Many  families  have  held  on 
too  long  and  lost  all. 

The  most  popular  investments  to-day  probably 
will  all  pass  over  yonder.  Yds  —  there  is  even 
reason  to  believe  that  some  day  the  best  of  to-day 
will  go  the  way  of  the  best  of  a  generation  ago. 
Telephones  will  always  be  used,  as  are  the  railways 
and  the  trolleys,  but  as  an  investment  the  cream  will 
some  day  be  gone.  Water  powers  form  a  most  pop- 


242  BUSINESS  FUNDAMENTALS 

ular  field  of  investment  to-day.  At  the  moment  I 
would  rather  buy  water  power  stocks  than  almost 
any  other  kind  of  stocks,  but  some  day  this  industry 
will  be  overdone  —  or  the  public  will  step  in  and 
seize  it  —  and  the  value  of  water  power  securities 
will  depreciate.  A  student  of  fundamentals  changes 
his  investments  according  to  the  changes  of  the  busi¬ 
ness  trend.  He  not  only  knows  when  to  buy  but  he 
also  knows  what  to  buy.  Only  by  having  such 
knowledge  can  he  avoid  the  pitfalls  and  profit  by 
the  changes  in  business  conditions. 

Don’t  take  flyers.  Avoid  gambling.  Shun  tips 
of  all  kinds.  Remember  that  the  only  way  to  make 
money  in  the  stock  market  is  by  rendering  service, 
and  the  only  way  to  render  service  is  to  store  up 
money  when  it  is  plentiful  and  then  use  it  when  it 
is  scarce.  This  means  that  in  a  period  of  prosperity 
it  is  better  to  buy  nothing  at  all  but  let  your  money 
accumulate  until  it  is  needed.  Follow  the  process 
of  the  ice  man,  who  cuts  and  stores  ice  in  the  winter 
when  it  is  a  nuisance,  knowing  that  before  the  year 
is  over  people  will  be  crying  for  it.  Hence,  I  say, 
when  business  is  good,  speculation  rampant,  and 
everybody  is  making  money  in  the  stock  market, 
keep  out  of  the  market.  Be  content  to  let  your 
money  accumulate,  because  the  day  will  come  again 
when  that  money  will  be  in  great  demand. 

Prosperity  usually  develops  into  a  period  of  over¬ 
expansion,  which  is  followed  by  a  decline  and  de¬ 
pression.  When  this  time  arrives  prices  tumble, 


INVESTMENT  PROBLEMS 


243 

brokers  fail,  and  panic  rules  on  the  stock  exchanges. 
If  you  are  a  student  of  fundamental  conditions  you 
will  know  when  this  period  has  arrived,  and  that  it 
is  the  time  to  buy.  Then  take  the  money  .which  you 
have  been  accumulating  and  keeping  in  liquid  form 
during  prosperous  times  and  use  it  for  the  purchase 
of  securities.  By  so  doing  you  can  step  into  the 
breach  when  you  are  most  needed,  and  enable  your 
money  to  perform  a  real  service.  When  you  begin 
to  buy  you  help  stop  the  panic  and  help  to  keep 
others  from  failing.  For  performing  this  service 
you  will  receive  a  handsome  profit.  You  will  re¬ 
ceive  good  interest  on  your  investment  and  be  able 
to  sell  at  perhaps  double  the  original  cost. 

Following  every  panic  comes  a  period  of  depres¬ 
sion  when  money  again  becomes  plentiful,  and  se¬ 
curities  again  rise  in  value.  Soon  an  improvement 
comes  when  stocks  and  bonds  soar  in  price  and 
everybody  is  talking  prosperity.  During  this  period 
the  securities  which  you  bought  become  very  valu- 
Every  day  prices  are  rising  and  your  profits 
icreasing.  Strangely,  as  prices  rise,  more  people 
ne  interested  in  the  stock  market  and  it  is  easier 
it  people  to  buy.  Only  students  of  fundamental 
conditions  have  the  courage  to  buy  during  panics, 
b\x(  during  prosperous  times  the  reverse  is  true.  Al¬ 
most  every  one  wants  to  buy  during  a  period  of  ex¬ 
pansion,  and  the  higher  the  prices  the  more  anxious 
they  are  to  get  aboard.  This  is  the  time  when  the 
student  of  fundamentals  sells.  Sell  everything  at 


244 


BUSINESS  FUNDAMENTALS 


such  a  time.  Get  your  money  into  liquid  form  and 
get  ready  for  the  next  depression. 

The  average  investor  is  like  the  farmer  who 
might  insist  on  planting  his  crops  in  the  fall  just 
because  there  happen  to  be  a  few  warm  days  in 
October.  The  average  investor  is  like  one  trying 
to  sell  straw  hats  at  the  North  Pole,  or  warming 
pans  at  the  Equator.  The  average  investor  is  the 
shortest-sighted  and  the  most  foolish  man  the  world 
has  produced.  Men  succeed  in  business  but  fail 
when  it  comes  to  the  investment  of  their  profits. 
Men  work  hard  for  wages  and  then  lose  them  all 
on  some  oil  or  mining  scheme.  Families  save  and 
sacrifice  only  to  see  their  savings  lost  through  some 
a  attractive  ”  investment. 

I  am  interested  in  helping  you,  my  readers,  in 
adapting  yourselves  to  all  forms  of  changing  busi¬ 
ness  conditions.  I  want  you  to  recognize  the  business 
trend  in  connection  with  your  labor  problems,  buy¬ 
ing  problems,  selling  problems,  and  the  study  of 
industries  in  particular.  But  I  am  not  so  worried 
about  your  success  in  business  as  I  am  about  your 
success  in  investing  the  money  which  you  accumu¬ 
late.  Again,  I  say,  it  is  easier  to  make  money  than 
it  is  to  kee'p  itl  The  dangers  which  beset  you  outside 
your  business  are  far  greater  than  the  dangers  which 
face  you  within  your  business,  especially  during 
your  years  of  struggle.  Hence,  I  am  anxious  that 
you  study  fundamentals  in  connection  with  the  pur¬ 
chase  and  sale  of  securities,  and  in  connection  with 
all  forms  of  investment. 


INVESTMENT  PROBLEMS 


245 

Briefly  this  means  five  things: 

( 1 )  When  purchasing,  select  a  bro^d  list.  Don’t 
put  all  your  eggs  into  one  basket.  And  neither 
should  you  use  baskets  that  you  know  have  holes  in 
them  just  for  the  sake  of  having  more  than  one. 
Select  only  securities  which  you  know  to  be  good, 
but  don’t  depend  upon  any  one.  Always  keep  your 
funds  invested  in  at  least  twenty  different  com¬ 
panies,  and  eight  or  ten  different  industries. 

(2)  Buy  stocks  during  panics.  This  will  mean 
that  you  are  buying  when  other  people  are  not  buy¬ 
ing.  Y ou  will  buy  during  the  dark  days  when  your 
friends  think  that  business  is  going  to  the  bow-wows. 
Remember  that  when  you  buy  something  for  noth¬ 
ing,  it  is  usually  worth  what  it  costs.  When  you  do 
what  everybody  else  is  doing,  you  generally  lose 
money.  Hence,  buy  stocks  during  times  of  panic 
or  depression.  The  rest  of:  the  time  be  content  to 
study  fundamental  conditions,  statistics,  and  charts, 
preparing  for  the  opportunities  which  will  some  day 
be  yours. 

(3)  Pay  outright  for  everything  you  buy.  Don’t 
buy  on  margin.  Keep  away  from  studying  the  tape. 
You  may  have  to  borrow  money  for  your  regular 
business,  but  don’t  borrow  any  money  for  the  pur¬ 
chase  of  securities.  Only  the  man  who  is  free  from 
debt  knows  what  it  really  means  to  be  healthy  and 
happy.  Y ou  may  have  to  get  into  debt  at  some  time 
in  the  purchase  of  goods,  but  unless  you  are  a  dealer 
in  securities  never  get  into  debt  for  the  purchase  or 


246  BUSINESS  FUNDAMENTALS 

sale  of  securities.  That  means  buy  outright  and 
never  sell  short . 

(4)  When  the  period  of  prosperity  comes,  sell 
all  and  liquidate  your  holdings.  Get  your  money 
into  cash  and  keep  your  cash  in  liquid  form.  Many 
know  when  to  buy  but  fail  to  know  when  to  sell. 
It  sometimes  takes  more  courage  to  sell  during  a 
period  of  prosperity  than  to  buy  during  a  period  of 
depression.  A  student  of  fundamental  conditions 
knows  when  to  do  both.  The  man  who  watches  the 
business  trend  will  know  when  to  buy  and  when  to 
sell.  When  it  comes  to  the  purchase  of  bonds,  four 
additional  rules  are  worthy  of  study. 

(5)  When  making  permanent  investments  for 
security  and  yield,  bonds  are  most  desirable.  Differ¬ 
ent  groups  of  bonds,  however,  may  be  purchased 
for  different  purposes.  The  following  classifications 
may  be  observed: 

Busmess  Men’s  Bonds:  These  are  the  bonds 
which  yield  the  most  and  consequently  have  the 
least  security.  Business  men,  however,  who  will 
confine  their  purchases  to  junior  liens  of  reorganized 
companies  will  secure  a  maximum  of  yield  without 
much  risk.  The  St.  Louis-San  Francisco  Railway 
Company,  prior  lien  5’s,  due  1950,  and  Missouri 
Pacific  Company  refunding  4’s,  due  1975,  are  illus¬ 
trations  of  business  men’s  b6nds.  Both  of  these 
properties  have  been  reorganized  and  these  junior 
issues  were  put  out  at  the  time  of  reorganization. 
Statistics  show  that  80  per  cent,  of  the  corporations 


INVESTMENT  PROBLEMS  247 

offering  securities  have  reorganized  oncey  but 
that  only  20  per  cent,  have  reorganized  twice . 
Therefore,  one  greatly  reduces  his  liability  of  loss 
by  purchasing  bonds  of  a  company  which  has  been 
reorganized,  especially  when  paying  high  yields. 

Investment  Bonds:  These  securities  should  either 
be  first  mortgage  bonds  recommended  by  high- 
grade  bond  houses,  or  else  should  be  underlying 
liens  of  reorganized  properties.  The  Chicago,  Rock 
Island  &  Pacific  Railroad  Company  refunding  4’s, 
due  1934,  are  an  illustration  of  such  a  bond.  This 
bond  went  through  the  reorganization  without  being 
disturbed.  As  stated  above,  one  greatly  reduces  his 
liability  to  loss  by  purchasing  securities  of  reorgan¬ 
ized  companies  j  but  this  liability  is  still  further  re¬ 
duced  by  buying  securities  which  have  been  through 
the  reorganization  undisturbed.  Many  such  issues 
are  listed  on  the  New  York  Stock  Exchange.  Unless 
one  buys  investment  bonds  from  a  high-grade  estab¬ 
lished  bond  house,  it  is  wise  to  confine  one’s  hold¬ 
ings  to  listed  underlying  liens  of  properties  which 
have  been  once  reorganized.  This  advice  especially 
should  be  heeded  by  women  and  those  who  must 
carefully  conserve  their  principal. 

Bonds  for  Churchesy  Libraries ,  Hospitalsy  and 
other  Philanthropic  Institutions:  When  buying  for 
others  one  is  subject  to  criticism.  Therefore,  it  is 
advisable  to  purchase  for  others  only  securities 
which  stand  well  in  the  popular  mind.  Although 
bonds  of  reorganized  companies  are  usually  intrin- 


248  BUSINESS  FUNDAMENTALS 

sically  better,  still  they  are  not  so  recognized  by 
people  in  general.  Therefore,  when  investing  the 
funds  of  some  quasi-public  institution  it  is  well  to 
confine  one’s  purchasing  to  the  bonds  of  what  are 
considered  the  highest-grade  corporations.  Bonds  of 
the  Pennsylvania  Railroad  Company,  the  New  York 
Central  Railroad  Company,  or  the  Northern  Pacific 
Railway  Company  are  illustrations  of  such  invest¬ 
ments.  It  is  true  that  these  properties  may  some  day 
suffer  the  fate  which  befell  the  Boston  &  Maine  Rail¬ 
road  Company  and  the  New  York,  New  Haven  & 
Hartford  Railroad  Company,  which  also  stood  very 
high  at  one  time.  Nevertheless,  when  purchasing 
for  others  it  is  well  to  be  governed  by  the  general 
opinion  rather  than  stake  the  funds  of  other  people 
solely  on  one’s  own  personal  opinion. 

Bonds  for  Trust  Funds :  When  purchasing  as  a 
guardian  or  trustee  under  appointment  by  the  court, 
one  should  be  even  more  careful.  None  of  the  three 
classes  of  bonds  above  mentioned  are  entirely  satis¬ 
factory  for  the  investments  of  such  trust  funds.  In 
certain  states,  such  as  Massachusetts,  Connecticut, 
and  New  York,  definite  securities  have  been  legal¬ 
ized.  Court  rulings  in  other  states  show  the  char¬ 
acter  of  bonds  available  for  such  purposes.  Bonds 
which  are  legal  for  the  savings  banks  of  the  states 
are  usually  legal  investments  for  trustees.  As  an 
illustration  of  such  bonds  may  be  mentioned  United 
States  Government  Liberty  bonds,  state  bonds,  and 
municipal  bonds  of  the  more  conservative  cities. 


INVESTMENT  PROBLEMS 


249 

Certain  railroad  bonds  are  also  legal  in  some  states 
for  such  purposes.  Certain  mortgage  bonds  of  some 
railroads  which  have  consecutively  paid  dividends 
of  a  certain  amount  on  their  capital  stock  for  a  cer¬ 
tain  length  of  time  are  included  in  such  lists  by 
some  states. 

Business  is  guided  by  fundamental  laws  the  same 
as  are  the  movements  of  the  planets  and  the  chang¬ 
ing  of  the  seasons.  A  man  may  make  a  meagre  liv¬ 
ing  through  industry  and  thrift  without  regard  for 
these  great  fundamental  laws  of  business.  Millions 
of  men  are  born,  live,  and  die,  without  ever  hearing 
of  business  phases.  If,  however,  you  are  to  become 
more  than  a  drudge,  if  you  are  to  have  the  joy  of 
being  a  factor  in  production  and  distribution,  you 
must  not  be  content  with  merely  working  and  sav¬ 
ing.  You  must  study  and  capitalize  fundamentals. 

I  know  of  a  family  that  for  years  lived  on  the 
Hudson  River  by  some  rapids.  Generation  after 
generation  looked  out  on  those  rapids  but  they  did 
no  more  than  look.  They  drudged  and  saved,  try¬ 
ing  to  make  wheat  and  potatoes  grow  on  the  hillside 
bordering  the  river.  Finally  a  young  man  of  the 
fourth  generation  came  back  from  an  eastern  col¬ 
lege  imbued  with  a  desire  to  use  those  rapids  for 
the  development  of  power.  His  family  laughed  at 
him.  They  said  that  the  rapids  had  always  been 
there  and  always  would  be  there,  and  any  dam  that 
he  could  erect  would  be  washed  away.  He  learned 
through  mechanics  that  the  same  laws  govern  both 


BUSINESS  FUNDAMENTALS 


2  SO 

the  stream  and  the  stability  of  dams.  He  believed 
that  he  could  depend  upon  those  laws,  not  only  to 
get  the  power,  but  also  to  build  a  dam  that  the 
river  would  not  .wash  away.  At  last  he  convinced 
others  of  his  project,  and  it  was  finally  developed. 
He  was  not  only  made  wealthy  but  he  was  able  to 
supply  light  and  power  to  the  whole  vicinity,  mak¬ 
ing  the  homes  more  cheerful  and  the  work  of  the 
housewife  easier. 

The  same  opportunities  exist  for  you  to-day. 
There  may  be  no  undeveloped  water  powers,  un¬ 
felled  forests,  or  undiscovered  mines  in  your  vicin¬ 
ity,  but  the  law  of  gravitation  applies  everywhere, 
and  the  law  of  the  business  trends  applies  every¬ 
where.  The  time  will  come,  generations  distant, 
when  this  Law  of  Action-Reaction  will  be  so  univer¬ 
sally  used  that  the  present  fluctuations  will  be  largely 
eliminated.  When  every  one  knows  about  business 
trends  and  applies  that  knowledge  there  will  be  but 
little  opportunity  for  you  to  capitalize  it  and  render 
service  by  its  use.  Rut  until  that  time  comes  a  great 
opportunity  for  service  and  profit  exists  in  the  study 
of  fundamental  conditions  and  business  trends. 


Chapter  XVIII 

CONCLUSION 


THIS  final  chapter  is  being  written  in  the  city 
where  I  was  born  and  brought  up.  The  first 
twenty-two  years  of  my  life  were  spent  here,  and 
I  have  often  been  back  to  it  in  recent  years.  Its 
people  are  a  fine  sturdy  race,  accustomed  to  struggles, 
yet  hospitable  and  optimistic.  It  was  a  fine  place 
in  which  to  bring  up  a  lad.  Every  boy  was  trained 
to  work  and  save,  as  there  were  very  few  natural 
resources.  Nature  provided  only  rocks,  bushes,  and 
the  opportunity  to  catch  fish  from  the  ocean  which 
pounds  the  shore.  Most  cities  are  surrounded  by 
fertile  fields,  verdant  forests  or  rich  mines  3  but  my 
home  was  favored  with  none  of  these  natural  re¬ 
sources.  Every  dollar  that  its  people  earned  came 
from  hard  labor  either  on  rocky  hillside  farms,  or 
on  the  ocean  where  many  men  went  never  to  come 
back.  These  difficulties,  however,  made  men  strong 
and  independent. 

Yet  wealth  was  made  even  under  these  trying 
circumstances.  There  were  many  rich  families  on 
the  Cape  during  my  boyhood  days  3  in  fact,  there 
have  always  been  rich  families  there.  One  of  the 
earliest  lessons  impressed  upon  me  ,was  that  natural 
resources  are  a  small  factor  in  determining  the 

251 


252  BUSINESS  FUNDAMENTALS 

wealth  of  a  people  or  a  family.  The  spirit  and 
thrift  of  a  city  are  much  greater  factors  in 
making  prosperity  than  are  natural  resources.  The 
latter  are  worthless  unless  the  people  are  imbued 
with  a  desire  to  create,  and  save,  and  study  funda¬ 
mentals.  Those  who  have  this  desire  can  succeed 
even  though  they  lack  the  natural  advantages. 
Hence,  my  people  accepted  the  rocky  shores  and 
turned  them  into  quarries;  they  erected  dams  be¬ 
tween  the  hills  and  made  ice  ponds;  they  went  out 
on  the  briny  deep  and  caught  mackerel,  haddock, 
cod,  and  Georges  halibut.  As  a  result  men  became 
rich  in  the  granite  business,  in  the  ice  business,  and 
in  the  fish  business. 

Industries  and  banks  grew  up  in  the  city.  Good 
stores  catered  to  the  merchandising  wants  of  the 
community.  Yes,  Gloucester  was  busy  in  those 
days  with  a  population  of  about  25,000.  It  is 
a  fine  city  to-day  and  in  some  respects  it  is  more 
active,  since  its  industries  are  more  varied  because 
manufacturing  is  gradually  developing.  Every  visit 
to  that  city  has  taught  me  some  lessons,  and  the 
past  week  has  been  no  exception.  It  is  the  thoughts 
that  have  come  to  me  during  recent  visits  which  I 
desire  in  this  last  chapter  to  pass  on  to  you  readers. 

One  of  the  most  sobering  thoughts  is  that  practi¬ 
cally  all  of  the  rich  families  of  my  boyhood  days 
have  since  lost  their  money.  The  city  then  had  its 
aristocracy,  the  same  as  Boston,  Philadelphia,  or 
Baltimore.  It  still  has  its  well-to-do  families,  but 


CONCLUSION 


253 

they  are  of  an  entirely  different  group.  Most  of 
the  beautiful  homes  of  my  boyhood  days  have  been 
sold  for  boarding  houses  or  for  commercial  pur¬ 
poses.  In  some  cases  the  old  folks  have  died  and 
only  the  children  survive ;  but  in  many  cases  the 
father  or  the  mother  is  still  living.  Some  of  the 
family  still  live  in  the  same  old  house,  but  the 
blinds  are  broken,  the  fence  is  tumbling  down,  tall 
grass  and  weeds  are  growing  in  what  was  once  a 
beautiful  garden,  and  the  appearance  of  the  place 
most  graphically  tells  of  the  family  tragedy. 

This  morning  I  have  been  up  and  down  Main 
Street,  Middle  Street,  and  Prospect  Street,  looking 
up  those  places  that  I  so  revered  in  boyhood  days. 
Men  who  had  great  businesses  ,when  I  was  a  boy, 
with  ships  sailing  all  over  the  world,  have  broken 
down  physically  and  financially.  Their  wives  and 
daughters  at  home  are  doing  their  own  work  and 
struggling  to  make  both  ends  meet. 

These  men  cannot  blame  the  city  for  their  change 
in  circumstances.  If,  to-day,  no  one  had  money 
in  Gloucester  it  might  be  blamed  on  the  rocks, 
bushes,  cold  winters,  or  treacherous  sea.  The  fact 
is,  however,  that  while  these  old  families  have  been 
gradually  tottering  and  disintegrating,  other  fami¬ 
lies  that  were  unknown  in  my  boyhood  days  have  been 
gradually  coming  to  the  front.  There  is  more  wealth 
to-day  in  my  birthplace  than  there  ever  was,  but  it  is 
possessed  by  a  new  set  of  people.  The  rich  boy  who 
had  the  ponies  and  lived  in  the  big  house  on  the 


254  BUSINESS  FUNDAMENTALS 

hill  is  now  struggling  with  a  little  business  or  work¬ 
ing  for  a  meagre  wage  to  keep  his  wife  and  family 
going.  The  poor  boy  of  forty  years  ago,  who  used 
to  sell  papers  and  come  to  school  barefooted,  is 
carrying  on  the  business  of  to-day.  In  fact,  a  large 
part  of  the  business  is  being  carried  on  to-day  by 
Jews,  Greeks,  Portuguese,  and  other  immigrants 
who  had  never  seen  this  country  when  I  was  a 
youngster. 

What  does  this  mean  to  you,  my  readers? 
Whether  you  are  rich  or  poor,  it  should  mean  much. 
If  you  are  in  good  circumstances,  it  means  that  — 
unless  you  carefully  heed  fundamentals  —  the 
probabilities  are  that  you  will  die  poor.  If  your 
wife  and  children  are  able  now  to  have  all  the 
things  they  want,  it  means  that  —  unless  you  be¬ 
ware  —  probably  they  will  some  day  have  to  strug¬ 
gle  for  the  bare  necessities  of  life.  On  the  other 
hand,  if  you  are  in  humble  circumstances  but  are 
industrious,  thrifty,  and  a  student  of  fundamental 
business  conditions,  you  and  they  may  enjoy  great 
prosperity  in  years  to  come.  This  does  not  mean 
that  all  rich  men  will  die  poor,  or  that  all  poor  men 
will  die  rich.  It  does  mean  that  the  families  now 
on  top  must  struggle  to  keep  from  going  to  the  bot - 
tomy  and  the  families  at  the  bottom  may  easily  rise 
to  the  top .  It  means  that  it  is  more  difficult  to  con¬ 
serve  a  business  after  it  is  created  than  it  is  to  create 
it;  and  that  it  is  more  difficult  to  retain  a  fortune , 
than  to  accumulate  one . 


CONCLUSION 


255 

What  broke  these  rich  families  and  caused  their 
businesses  to  go  to  pieces?  The  answer  is  very- 
simple.  It  is  that  these  men  knew  the  fishing  busi¬ 
ness,  the  granite  business,  the  ice  business  or  were 
good  merchants  j  but  they  failed  to  understand  the 
fundamentals  of  business.  They  were  industrious 
and  thrifty  only.  When  they  happened  to  be  work¬ 
ing  with  a  favorable  tide  of  the  business  trend,  they 
were  prosperous  and  made  a  lot  of  money.  But 
knowing  nothing  of  such  fundamentals,  they  failed 
to  recognize  the  new  conditions  when  the  tide 
turned.  They  knew  nothing  about  the  four  great 
periods  of  the  business  phase,  and  they  never  knew 
in  which  period  they  were.  Consequently,  when 
the  tide  of  business  turned,  instead  of  changing 
their  old  methods  and  adopting  new  methods 
for  the  new  phase  of  business,  they  continued 
in  the  same  old  way.  Some  went  through  the  bank¬ 
ruptcy  court,  some  merely  assigned  in  favor  of  their 
creditors,  and  others  simply  petered  out.  With  very 
few  exceptions  the  business  of  every  one  of  them 
is  gone  to-day.  In  some  cases  the  business  is  being 
carried  on  by  others,  but  in  many  cases  the  old 
wharves  are  not  used,  the  old  quarries  are  idle,  and 
the  farms  are  being  cut  up  for  the  summer  visitors. 

Old  concerns  when  failing  often  have  so  much 
indebtedness  that  the  once  bare-footed  boy  can  bet¬ 
ter  afford  to  build  a  new  wharf,  open  a  new  quarry, 
or  start  a  new  business  for  himself  and  by  himself, 
than  to  take  over  the  old  wreck  with  its  mortgages 
and  indebtedness. 


256  BUSINESS  FUNDAMENTALS 

I  •  .1  .  »  . 

I  (  History'  continually  repeats  itself.  Statistics 
clearly  show  that  almost  all  successful  businesses 
have  been  started  either  in  a  cellar  or  in  a  garret. 
Very  few  successful  businessses  of  to-day  started 
under  auspicious  circumstances.  Very  few  have  built 
on  the  ruins  of  other  businesses.  The  great  busi¬ 
nesses  of  to-day  started  yesterday  in  the  most  hum¬ 
ble  way;  and  the  great  businesses  of  tomorrow  are 
to-day  being  operated  in  cellars  and  garrets.  We 
look  down  upon  the  Greek  fruit  dealer,  the  Italian 
contractor,  and  the  Jew  tailor;  but  let  me  say  that 
these  Greeks,  Italians,  and  Jews  may  be  the  great 
business  men  of  the  next  generation.  Unless  very 
careful,  we  and  our  children  will  be  working  for 
them.  They  are  very  likely  to  be  the  bank  presi¬ 
dents  of  our  great  cities,  the  owners  of  our  large 
department  stores  and  the  captains  of  industry  in 

I95°* 

The  wheel  of  opportunity  is  constantly  revolving. 
It  is  very  easy  for  those  who  are  now  on  the  top  to 
be  swept  off  when  a  change  takes  place  in  the  great 
fundamental  tide  of  business.  It  is  a  comparatively 
easy  thing  for  those  who  happened  to  get  onto  the 
wheel  at  the  right  point  of  the  business  trend  to 
make  money  owing  to  a  change  in  the  tide  over 
which  they  have  no  control.  These  men,  if  they 
are  industrious  and  honest,  cannot  help  being  suc¬ 
cessful  for  ten  or  twenty  years.  However,  for  a 
man  to  get  on  the  wheel  and  stay  on  the  wheel 
through  the  periods  of  over-expansion,  decline,  de- 


1 


CONCLUSION 


pression,  and  improvement  is  a  great  task  that  very 
few  have  the  foresight  and  patience  to  accomplish. 
The  reason  is  that  business  men  do  not  understand 
fundamental  conditions.  Many  of  them  do  not 
know  about  business  trends  5  others  fail  to  recognize 
their  effect  upon  them;  and  very  few  are  willing 
to  change  their  methods  when  the  change  comes  in 
fundamental  conditions. 

Mind  you,  I  do  not  say  that  these  trend  move¬ 
ments  must  continue  indefinitely  or  that  these  waves 
during  the  coming  years  need  be  as  severe  as  they 
are  at  present.  Business  could  get  along  without 
them  just  as  an  individual  can  get  along  without 
being  sick  if  he  will  govern  himself  in  accordance 
with  the  basic  laws  of  health. 

Dissipation,  however,  is  always  followed  by  its 
headache  and  recuperation  period,  and  as  long  as 
business  continues  to  go  on  recurring  sprees  of  over¬ 
inflation,  we  must  expect  the  inevitable  and  equiva¬ 
lent  reaction  of  deflation  and  hard  times.  You  can¬ 
not  ignore  the  law  of  Action  and  Reaction  any  more 
than  you  can  ignore  the  law  of  gravitation.  ^ 

Of  course  in  some  cases  property  has  been  dissi¬ 
pated  by  heedless  children.  In  a  few  instances  cer¬ 
tain  catastrophes  have  taken  place  for  which  the 
owners  were  not  to  blame.  In  90  per  cent,  of  the 
cases,  however,  the  successful  families  of  the  last 
generation  would  still  control  the  business  interests 
of  their  city,  if  they  had  only  known  fundamentals 
and  changed  their  methods  when  fundamental  con- 


BUSINESS  FUNDAMENTALS 


258 

ditions  changed.  The  truth  is  that  they  uncon¬ 
sciously  rode  to  success  with  the  tide,  and  when  the 
tide  went  out  they  were  left  stranded  on  the  beach. ) 

Hence,  I  appeal  to  the  business  men  of  to-day  to 
avoid  these  pitfalls  into  which  our  predecessors  have 
fallen.  Business  disasters  are  no  more  necessary 
than  are  cholera  or  smallpox  scourges.  There  is  no 
need  of  business  failures.  To  have  new  families 
succeed  it  is  not  necessary  for  old  families  to  fail. 
Business  opportunities  in  America  have  not  yet  been 
scratched.  Greater  opportunities  exist  in  every  com¬ 
munity.  The  old  families  of  the  past  generation 
should  still  be  successful  and  have  even  greater 
businesses  to-day  than  they  ever  had.  At  the  same 
time  there  are  opportunities  for  other  families  also 
to  climb  up  the  ladder  and  be  successful. 

There  never  was  a  time  when  there  were  so  many 
opportunities  for  those  who  have  the  “  Six  Ps  of 
Success  namely,  Integrity,  Industry,  Intelligence, 
Initiative,  Intensity,  and  Inspiration. 


Date  Due 

~  ■  err 

OCT  30 ’57 

^oy  ?^’c? 

DEC  -Z  '51 

0cr2s^ 

MAR  2  ( 

1983 

/ 


BOSTON  COLLEGE 

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